Uneasy equilibrium seen for global economy amid geopolitical risks

As 2023 was drawing to a close, there were mounting concerns that the war in Ukraine, Israel-Gaza conflict along with the Red Sea tensions, soaring inflation and the rising cost of servicing debt could trigger a global recession.
But the world is finding an uneasy equilibrium with a more benign economic backdrop overshadowed by geopolitical risks, according to the final Davos panel of 2024.
The prospects of subsiding inflation and a pickup in global trade offer some encouragement for investors despite the backdrop of war and populism, European Central Bank chief Christine Lagarde and peers agreed as the World Economic Forum drew to a close.
“Normalisation — that’s what we have begun to see,” she told the audience, before adding an important qualifier. “It is not normality that we’re heading to,” she added.
The optimism has at times been undermined by the spectre of geopolitics, with wars in Ukraine and the Middle East looming large, and Red Sea tensions too.
Donald Trump’s Iowa victory, setting him on the road to the Republican nomination, was also greeted with alarm by many attendees.
While the explosion of debt is throwing a shadow over global economic growth, WEF experts warn that sub-Saharan Africa, where several countries are already in default, is experiencing its worst-ever crisis.
In 2022, African public debt stood at $1.8tn, a 183% jump from 2010, having grown at around four times as fast as economic output, according to UN figures.
After Covid and the war in Ukraine, free-trade boosters in Davos fretted over a new bout of turmoil in global supply chains due to rising geopolitical frictions.
Before the Israel-Hamas conflict in October, the World Trade Organisation had forecast global trade growth of 3.3%, an improvement from 0.8% in 2023. But WTO chief Ngozi Okonjo-Iweala told the WEF that she was now “less optimistic” about world trade in 2024 due to “worsening geopolitical tensions”.
She added, however, that it would be “much better than what we saw in 2023. Unless a major war breaks out, then all bets are off.”
The Red Sea route carries about 12% of global maritime trade, but the attacks have prompted many companies to take a massive and costly detour around the southern tip of Africa.
There are concerns along other major trade routes.
Taiwan’s presidential election has renewed US-China tensions over the island, which China considers a part of its territory that must be brought back under its control, by force if necessary.
Speaking in Davos, US Secretary of State Antony Blinken recalled that a huge amount of commerce flows through the Taiwan Strait.
“If that were to be disrupted, it would affect the entire planet. And it’s about the last thing we need, especially coming back from Covid,” Blinken said.
On top of geopolitical tensions, climate change has also played tricks on global trade.
A drought and water shortages linked to the El Nino weather phenomenon reduced ship traffic through the Panama Canal.
Talk of AI rippled through Davos meeting rooms and panels, its promise touted on signs and its security risks invoked by China’s premier. While conversations included how to regulate the burgeoning technology and how to apply it to scientific discovery, the question of how to monetise it persisted.
Heads of global banks have warned of inflationary pressures from increased shipping costs and the possibility of oil price rises. Bank executives fear the market is mispricing interest rate cuts, and that geopolitical risks could cause volatility.
In Davos, participants tended to put a brave face on the global outlook, accentuating the likelihood that a deep recession will probably be avoided despite unprecedented monetary tightening to bring inflation under control.