One month before the American presidential election, we can be reminded that in the short and medium term, the geopolitical map remains the greatest threat to the financial markets, if not to the global economy.
The price of gold was the key witness to this. The price of the yellow metal has continued to jump from record to record since 2020. Against the backdrop of persistent inflationary pressures, this safe haven has been fueled by the pandemic and the outbreak of the Russian invasion in Ukraine. and the conflict in the Middle East. At nearly US$2,300 per ounce, the price of the yellow metal shows a gain of more than 50% since US$1,500 at the start of 2020, making it one of the best-performing assets on the market. “Certainly, the risk of recession and stock market correction has diminished, but concerns persist about the return to the inflation target and geopolitical tensions,” summarize the economists at Mouvement Desjardins.
Thus, the rise in the price of gold is largely based on uncertainty. The global uncertainty index reached a peak of 55,685 points in the first quarter of 2020, following the outbreak of the pandemic, only to fall to around 11,880 points a year later, then rebound to more than 29,340 in the second quarter of 2022, thus echoing the Russian invasion of Ukraine. It is currently slightly above 15,000 points, the same level as that observed during the 2008 financial crisis.
Reversal of globalization
The biggest unknown remains the evolution of geopolitical tensions, which have already slowed down, or even reversed, globalization. Policies and trade are now more focused on geopolitical aspects than on economic criteria. “Governments are closing in on themselves. “Relationships, alliances and trade blocs are growing in importance, and security, technology transfers and the resilience of supply chains are central issues,” said Robert Hogue, deputy chief economist at the Royal Bank, in his overview of the major themes for 2024.
More recently, globalization has been undermined in particular by American protectionism, by the pandemic and the awareness of the fragility of supply chains that it has induced, and by growing geopolitical tensions leading to new commercial constraints. “There is now a political will in the West to repatriate certain industries locally or to better choose its commercial partners in order to increase the resilience of supplies to different shocks. To concentrate exchanges between “allied” or “friendly” countries with a similar vision with regard to democracy, social development and environmental protection,” write the Desjardins economists. All of this is part of a duality between the two greatest economic powers engaged in a competition for influence.
In June, on the occasion of the celebration of 60 years of UN Trade and Development, the Secretary-General of the United Nations, António Guterres, expressed alarm at the decoupling of the world economy. “The international trading system […] is contested from all sides and on the verge of fragmentation,” he lamented, according to comments collected by The Canadian Press. He notably highlighted the almost tripling of new trade barriers introduced since 2019, mainly for reasons of geopolitical rivalry. The International Monetary Fund (IMF) for its part underlines that, since the pandemic, references to the concepts of relocation (reshoring Or onshoringin English) and local relocation (near-shoring) in company results presentations have increased nearly tenfold.
The cost of fragmentation
Slowdown in the global economy, climate change, cost of living crisis and high debt levels… Geopolitical tensions make the resolution of these crucial planetary issues even more difficult. “The threat of a new Cold War is looming, with the possible fragmentation of the globe into competing economic blocs. This would be a collective error, which would result in greater poverty and less security for all,” warns the IMF.
Estimates of the cost of fragmentation—or even an increasingly likely scenario in which countries are forced to choose between the United States–European Union bloc and the China–Russia bloc—vary widely. “The longer-term cost of trade fragmentation alone would be almost 7% of global GDP in a high fragmentation scenario, roughly equivalent to the combined annual output of Germany and Japan. If we add the cost of technological decoupling, some countries could suffer losses of up to 12% of GDP,” calculates the IMF.
According to what history teaches, the magnitude of these losses in global GDP would roughly correspond to that due to COVID-19 in 2020. And we are talking, here, about permanent losses.
The global impact would likely be even more pronounced. Still according to the IMF, “in addition to trade restrictions and obstacles to the diffusion of technologies, fragmentation could be felt through restrictions on international migration, a reduction in capital flows and a significant reduction in international cooperation, all of which are factors likely to render us incapable of remedying the problems of an increasingly destabilized world.”
Added to this uncertainty is the American election in November, which caps a rather rich electoral year. More than 54% of the world’s population, representing nearly 60% of global GDP, had an appointment with a national election, against a backdrop of the rise of authoritarian populism and the persistence of dictatorial regimes across the planet, already written the Office of the Superintendent of Financial Institutions.
Which has led analysts to say that with centrist parties in decline and the accentuation of the left-right divide (read: the far right), the world order is now swinging to the rhythm of the ballots.