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The Year of Major Economic Transformations

26 February 2024

Some analysts believe that the most significant events of the current year will unfold at the highest levels of certain prominent countries, such as the United States of America and India, where both presidential and general elections are set to take place this year. However, the issue extends beyond national elections to encompass various sources of global economic turmoil that are poised to alter the world's structure for decades to come.

Geopolitical unrest 

The ongoing Russia-Ukraine conflict, coupled with the absence of a resolution on the ground, is exacerbating the situation in Europe, leading to increased division and fragmentation. The continuation of battles without a foreseeable peaceful resolution is likely to result in more crises, including food and energy shortages, as well as disruption of trade in the Black Sea, particularly given the relative importance of the two countries in the conflict, in terms of food safety and energy production and trade.

On the other hand, the Middle East region has been on fire since October 7, with a regional war that is always subject to escalation. The two-state solution, opposed by the Netanyahu government in Israel despite mounting international pressure, is critical for achieving this peace. Furthermore, the disruption of trade movement in the Suez Canal due to Houthi attacks on ships crossing the Bab al-Mandab Strait has extensive implications. This not only affect the canal’s revenues, which Egypt considers an important vein for foreign currency, but also has a detrimental impact on global trade. The higher cost of transporting, insuring and securing shipped commodities, is passed through to feed global inflation. 

Whether crossing through the strait or fleeing from it to the longer and more expensive Cape of Good Hope route, this rise in trade costs represents a new inflationary wave in a world where inflationary attacks have not abated since the outbreak of the Covid-19 crisis, and even earlier, at the dawn of the trade war between China and the United States in 2017.

Asia, in turn, is not immune to global turbulence, which might flare up at any time. The conflict between the two Koreas and the tension between India and Pakistan are just some manifestations of these underlying disorders. Moreover, the potential Chinese military move against Hong Kong or Taiwan, under the heft of the Chinese economic crisis (further explained later) and the pressure of the American economic blockade supported by the West, would have far-reaching consequences.

The New World is not exempt to the law of approaching upheaval. The United States, the world's largest economy and the only advanced economy that was able to maintain higher-than-expected levels of economic growth over the past year, while also achieving a kind of soft landing for its tight monetary policy, is suffering from potential divisions. Texas state Rep. Bryan Slaton has introduced a bill that would place a referendum for Texas’ secession from the United States on the 2024 ballot.

The continent of Africa remains tumultuous, with uncertainty surrounding the resolutions in Sudan and Libya. Furthermore, the potential ramifications of radical Islamist movements prevailing over regular armies in Mali and Burkina Faso, amid the continent’s wave of coups, are unknown. The emerging influence of what might be termed as the third generation of extremist organizations, manifested in quasi-states like the proliferating ISIS mini-states, has played a key role in reshaping the global landscape in recent decades.

Extremists Quasi-states, not only serve as a parallel system whose images have been manifested in many forms (currencies, stock markets, communication...), but also pose a threat to global stability. They endanger the survival of the global system and its already limited capacity to handle diverse global concerns and crises. A potential new ISIS state in the Sahel Province of Africa could be significantly larger and more dangerous than the one in Syria and Iraq.

High cost of funds and severity of supply-side shocks

The consumer gluttony that accompanied the concepts of the welfare state and deficit financing, has doubled the risks of debt accumulation, until it consumed more than three times the global GDP. The negative repercussions of such tendencies are perfectly reflected in hyper inflation and higher interest rates. The rise of right-wing movements in the United States and Europe also had an important impact on fueling deglobalization trends, by imposing restrictions on the free mobility of goods and individuals, in favor of localization of production, self-sufficiency, and self-orientation. 

The aforementioned geopolitical turmoil caused further disruption to supply chains, further worsening the impact of inflationary waves that can only be addressed through further monetary tightening and fiscal restraint. This means a further rise in interest rates, and thus, a rise in the cost of financing required to sustain growth, combat widespread poverty, achieve energy transition goals, and neutralize climate change. These critical issues have become harder to attain in light of these austerity policies and disruptions affecting the supply of traditional energy sources.

Dealing with demand-side shocks that have persisted since the 1930s using traditional Keynesian remedies was acceptable. It worked well by inducing effective demand and encouraging debt financing. However, in the future era, these will become unproductive instruments for coping with supply-side shocks such as inflationary pressures, high finance costs, commodity shortages, and worsening service levels.

Insights into the near future 

Perhaps in the near future, the world will witness fewer "white elephant" projects, where the costs of establishment and maintenance outweigh their economic benefits. The era of excessive extravagance will conclude with the concentration of wealth in the hands of a small number of people, as prophesied and illustrated by the French economist Thomas Piketty in his renowned book ‘Capital in the Twenty-First Century’, “People shall revert to the days of repairing old items rather than replacing them with new ones when they wear out”.

Governments will have to reallocate scarcer resources to more priority and urgent expenditures. This entails a further decline in spending on infrastructure projects in favor of spending on improving living conditions and the quality of services provided to individuals. At the same time, private investment will move away from growth projects, with low or delayed return on investment, due to the escalating level of uncertainty, the high cost of funds, the high frequency of fluctuations, and severe economic cycles.

Jerome Powell, the US Federal Reserve Chairman, has recently signaled to markets, a new wave of monetary easing this year. However, capital markets have over-interpreted these signals, and the data shows that inflation rates, which had slowed at the end of last year, have surged again, owing to very complicated international consequences that foretell further inflation. As a result, potential monetary easing may be slower than anticipated, as central banks are unlikely to return to flooding markets with money supply, adopting quantitative and qualitative easing policies that have been widely used since the 2008 financial crisis, contributing to further market disruptions.

Deteriorating environment conditions and declining climate action

Climate change is no longer a mere hypothesis. Negative expectations for this transformation in 2050 are already evident today, as the world approaches 2030, the deadline for achieving the world Bank's fifteen Sustainable Development Goals. Drought rates, decreased agricultural land productivity, air pollution, and global warming- are all issues that have rapidly worsened and become alarming, to the point that the Secretary-General of the United Nations has referred to what the world is seeing today as “global boiling” rather than “global warming”.

Funding for global climate action has nearly doubled from $653 billion in 2019-2020 to $1.3 trillion annually in 2021-2022. However, the proportion of climate finance “actually” used for adaptation is declining, dropping from 7% to 5% of total climate finance between the two periods. The financial cost of the energy transition is likely to be large due to high investment needs. 

Simulation models reveal that the transition, under all scenarios, will be capital-intensive, with total capital expenditures required by 2040 ranging from US$32.7 billion in the simple adaptation scenario to US$94.9 billion for the deep and impactful decarbonization scenario. The majority of these investments must be paid off early; By 2025, approximately 28% of total capital costs should be allocated to the energy transition. All transition options will incur a large financial cost, which will be reflected in the countries’ public budget deficits as a percentage of their gross domestic product.

Growing risks of the US presidential elections 

The probability of the US former President Donald Trump getting re-elected in 2024 raises concerns about potential on environmental action, as he previously announced a withdrawal from the 2015 Paris Climate Agreement. This probability also threatens to further limit and force China out of the supply chains for semiconductor manufacturing, particularly Advanced electronic Chips. This limitation would motivate China to adopt aggressive measures to counteract. These measures shall not be limited to the extension of the BRICS group, or the attempt to control international commerce, or even the expansion of manufacturing outside mainland China, away from direct sanctions. They could be extended to militarily actions against Taiwan, which lies in the Chinese missile range, and considered a worldwide dominant of the production of semiconductors. 

Perhaps the US disguised sanctions also brought back to the forefront the principle of "one China," which further complicates the issue of Hong Kong’s independence, seeing how China considers Hong Kong as part of its territory and insists on this as a pre-condition for defining its allies. 

Real estate crisis in China

China is currently facing a severe real estate crisis. This crisis is casting a heavy shadow on both the formal and informal financing sector, the growth rates of the Chinese economy, and mostly recently, foreign investment flows to China, which recorded their lowest annual level since 1990. 

This real estate crisis has manifested in several forms. For decades, China's robust housing market has lifted many people out of poverty. However, according to a survey by the People's Bank of China, real estate accounted for 59% of household assets in early 2020, yet it also created a tilted tower of debt, making up 75% of household liabilities. The Chinese real estate market relies heavily on shadow banks. This contributed to the total debt of companies, governments, and families exceeding 300% of annual economic output.

According to the International Monetary Fund, China's growth rate in 2024 is anticipated to be around 4.6%, down from 5.4% the previous year. China's annual growth rate reached a high of 14.2% in 2007.

Imminent global transformations

All of these cascading crises, including escalating viral attacks, natural disasters, and climate change, make this year, and perhaps the coming years a crucial transitional period for structural economic transformations that will profoundly affect the world as we know it. Major changes are expected to take place in the balance of power and alliances, capital flows, international trade dynamics, supply chains, poverty rates, social unrest, and the increasing power of radical groups and quasi-states at the expense of a stable global order.