Thinking about geopolitics

Is 2024 the year of geopolitics? It certainly feels as if risks lurk around every corner, and investors are bombarded by scary headlines daily.

Of course, that is much better than being hit by actual bombs, something we’ve seen not only in Gaza in recent weeks but also in other parts of the Middle East, including the Red Sea, Iran, Iraq, Pakistan and Jordan. The ongoing loss of life is tragic, and we must ask whether these separate but interrelated conflicts are escalating to a point where the global economy is severely impacted.

The obvious place to start is the Red Sea, a major maritime channel where attacks by Iranian-backed Houthi rebels are forcing many ships to take the longer and costlier route around the Cape (sadly with little benefit to the South African economy). About a third of the world’s shipping containers usually flows through the Red Sea and the Suez Canal, a route that connects Europe with China and the rest of Asia.

The memory of the worldwide supply-chain snarl-ups of 2021 and 2022 and associated surge in inflation is still fresh. Will we see another jump in goods prices as shipping costs rise? Possibly, but as Chart 1 shows, the increase in shipping costs is not as big as during 2021. The disruption is only on one (albeit important) shipping route. Trade across the Pacific is unaffected, and unlike during the pandemic, operations at the world’s major ports are running smoothly.

Chart 1: Shanghai Freight Cost Index

Source LSEG Datastream

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