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ECONOMY | 01.24.2024

Energy markets and geopolitics are the primary risks for the global economy in 2024

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The year starts with an intensification of the conflict between Israel and Hamas, initiated on October 7th, which has already extended its impact beyond their borders. Houthi rebels, with ties to Iran, have targeted commercial vessels, prompting a specific security mission by the United States and a potential coercive response from Iran.

The escalating tensions in the region have introduced a new risk to the global economy, as highlighted by MAPFRE Economics in the report ‘Economic and Sectoral Outlook 2024: Towards the First Quarter’, published by Fundación MAPFRE.

Despite the initial surge in safe-haven assets like gold and oil prices, the markets have since stabilized, even with indications from the Organization of the Petroleum Exporting Countries (OPEC) of potential new supply restrictions. Presently, the price of oil hovers around $78 per barrel, and futures markets anticipate a moderation towards the $75-$70 range.

Conversely, the price of natural gas, which had initially risen by 20% to €50 per megawatt-hour, appears unlikely to continue its upward trajectory and remains considerably below the peak observed in 2022 at €292. Strategic reserves and increased capacity for importing liquefied gas from the United States, unaffected by maritime transit issues, sustain consistently higher prices, influencing long-term inflation resistance without the dramatic spikes witnessed two years ago.

In broader terms, the backdrop of heightened social volatility and geopolitical tension reached its pinnacle by the close of 2023. Consequently, the geopolitical landscape poses a tangible risk to the global economy, with a real possibility of the conflict expanding to the region and triggering a crisis akin to the Middle East’s experiences in the 1970s during the Yom Kippur War.

The unconditional support of the United States for Israel raises concerns about the viability of simultaneous financial support to Ukraine, which, on the flip side, is grappling with a downturn in a conflict seemingly at a stalemate. A reshuffling of priorities by the Democratic Congress or a reinforced U.S. stance could diminish support for Ukraine, potentially hastening a more certain resolution to the crisis.

Europe is also grappling with the impact of events in the Sahel, not just due to the coup in Niger representing another democratic government's fall in favor of a junta but also as France progressively loses influence to Russia and China, jeopardizing the stockpiling of materials crucial to its atomic energy industry.

Furthermore, the standout aspect of 2024 is the global surge in elections. Over the coming months, more than 4 billion people are slated to cast their votes. It is, therefore, a “decisive” year marked by the convergence of trends, geopolitical tensions, social unrest, and electoral processes that, in many instances, lack complete transparency.

Other risks to the economy

Inflation remains a persistent concern identified by MAPFRE Economic Research, reflecting a prolonged presence on the risk list. “The downward moderation in global inflation data continues, but it faces increased resistance due to some supply constraints,” the report explains, emphasizing that the deceleration in price increases remains an ongoing process, vulnerable to the risk of resurgence.

Financial risk and global debt are also focal points for scrutiny, particularly considering that by the end of the third quarter of 2023, global aggregate debt reached a staggering $307.4 trillion, equivalent to around 333% of the global GDP.

The ongoing impact of rising benchmark interest rates, coupled with their transmission across the financial landscape, especially in the context of diminished support from central banks, continues to exert pressure on the debt servicing costs of many nations. In certain cases, this dynamic may feedback into corporate debt.

Concurrently, the report underscores the potential risks associated with a combination of more stringent monetary policies and targeted government stimulus measures, aiming to avert economic downturns in both the United States and the Eurozone, making economic policy another critical factor to monitor in 2024.

The real estate sector faces challenges due to rising interest rates and tighter access conditions, contributing to a diminishing interest in the market. This trend is observable in notable declines in new home construction, particularly evident in countries such as Germany (-30%), France (-24%), and the United States (-30% in residential construction, -7% overall).

China's real estate market poses specific challenges, marked by financial strain over the past two years. The central bank's monetary policy adjustments aim to sustain credit flow, while an unexpected fiscal support of 1 trillion yuan has been announced by the government, increasing the deficit to 3.8% of GDP.

Lastly, but no less important, is the impact of climate change. Vulnerabilities related to climate change manifest predominantly through extreme weather events, influencing food prices and material costs, including cyclones, hurricanes, and floods. While society must intensify investments in the energy transition, there is a risk of disrupting access to affordable energy, with potential repercussions on competitiveness, productivity, and overall economic activity.