The Cutting Edge Outlook: Regional Wars and Their Global Implications
The current conflicts and tensions that have been ongoing and erupted during the year, have heightened market volatility, primarily due to the rivalry among the world’s largest powers for resources. Therefore, when instability and uncertainty increase at certain locations in the world, with a possible wider impact, we usually see the financial markets being affected as well. Let’s dive into the possible impacts on the regional and global economic outlook, from the war in Ukraine, Israel and the heightened tensions between China, the US and China’s neighbours.
The European Theatre
At the time of this article, the conflict between Russia and Ukraine is already in its 2nd year of fighting and appears to have no end in sight. The conflict highlighted the vulnerability of various economies to the relative scarcity of resources. Yet the sanctions imposed on Russia, whether effective or not, also highlighted the dependency of Europe on Russian energy sources and widened the possible impact on the oil and gas markets, which was apparent when Europe rushed to replenish the energy void, left behind by Russia.
With the war having stagnated for the better part of a year and the Ukrainian counteroffensive bringing little gains, the disappointment amongst its allies appears to be spreading, causing wider concerns as to whether it is worth funnelling money into an endless war. Furthermore, the impact of EU sanctions on the Russian economy appears to have been insignificant in crippling the war efforts of the Kremlin.
That may be another reason why we anticipate that Ukraine may be willing to agree on some concessions, in order to reach an agreement on a ceasefire, thus paving the way towards a peace deal. In such a scenario, we may see the pressure on the commodities markets, easing as the situation de-escalates. On the other hand, we have to mention that reports for a Russian counteroffensive by next Spring are circulating in the media, which is a scenario that highlights a possible prolongment of the war and could weigh on the global economic outlook.
The Middle East
The Hamas terror attacks on October 7th and Israel’s reaction by bombing the Gaza strip, have turned the Middle East into a tinderbox waiting to explode which could lead to a wider regional war. The USA has repeatedly warned other actors in the Middle East and in particular Iran, to avoid entering or “taking advantage” of the current conflict, in an attempt to deter a wider escalation of hostilities which could spread across the region.
In order to deter further escalation, the US has deployed some of its aircraft carrier strike groups in the eastern Mediterranean, yet exactly those forces may also be viewed as a provocation act by some Arab states. We expect that the region may see increased volatility should Hezbollah enter the conflict and open another front against Israel. Yet, we do not anticipate seeing a full-frontal attack by Iran, but rather a proxy war, where they supply weapons and ammunition to militias fighting against Israel.
Given that neighbouring countries may want to avoid being drawn into the conflict, for various reasons, alternative reactions may occur. The spectre of a possible weaponization of oil is floating over the global economy and is a scenario that upsets the commodity markets, with possibly far-reaching consequences. In particular, Saudi Arabia and the UAE could manipulate the supply of oil, in order to exert economic influence on nations that may be deemed as hostile, yet the issue could constitute a form of hybrid economic warfare.
Furthermore, given the global dependence on oil, a widespread conflict could lead to an increase in oil prices, with the prospect of reigniting inflationary pressures in most economies. In turn, such a development may force central banks, especially in developed western economies, to tighten their monetary policy practises further and thus weigh on global economic activity and demand.
Despite the South-East Asia region, not being military as “active” like the European and Middle East theatres, there appears to be some tensions brewing under the surface. For example, China and Taiwan could be the next flashpoint, given the intentions of China to fully integrate the island under its control either by economic or military means. However, given Taiwan’s status as a major semiconductor producer, the West appears to have vested interests in preventing such a scenario, as the island currently falls under the US first island chain strategy, aimed at containing China.
The current situation in the region appears to be relatively stable, with a few intrusions and military drills every now and then, yet China’s presence seems to be intensifying on a military level over the past year. Furthermore, given the pressure on U.S forces who have more concerning matters in Europe and the Middle East, their status as the security guarantor in the region may be put into question. China’s assertiveness may have been enhanced following the apparent ineffectiveness of Western sanctions on Russia. Should the current situation remain, there may be no or little impact on the markets.
However, should China decide to be more aggressive with its neighbours, perhaps to the extent that it decides and attempts to blockade Taiwan, or infringe on the Philippines’ exclusive economic zone, it could potentially lead to retaliatory measures by Western nations which may take the form of curbing China’s imports in an attempt to impact their economy and exert economic pressure on the nation.
Such attempts could escalate trade wars between China the U.S. and its allies, and strain further procurement chains. The hypothetical retaliatory measures could greatly impact the global economy, slowing economic activity, especially in the manufacturing sector. In addition, it may also lead to inflationary effects on various economies, given China’s status as a major importer on a global scale, in addition to being a major manufacturing goliath in the world economy.
In conclusion, the heightened risks on a global level of numerous confrontations across the world, in our opinion may lead to higher prices for commodities as supply chain concerns arise and physical supply decreases. The numerous conflicts, appear to be testing the ability of the United States to maintain its status as the world’s largest security guarantor, as challengers appear to be on the rise.
Regarding the war in Ukraine, we believe, that the waning public support for Ukraine could force the two nations to the negotiating table, as without supplies from the West, we find it unlikely that Ukraine will be able to keep the Russian army at bay. In the Middle East, we believe that the war will last a few months at the most and that a full regional war may not occur.
Partially due to the USA continuing to flex its military muscle in the region, which might deter a full-blown regional war. Lastly, the Chinese issue. China’s amped up rhetoric of the 9-dash line in the past year, has drawn condemnation from its neighbours which claim that China’s ambitions infringe on their territorial sovereignty. Although unlikely at this point in time it could lead to an armed conflict in the region, and as such we remain vigilant about potential developments.
Therefore, although our view may appear pessimistic, we believe that within the next year, our world perception will be changed for decades to come, with new allegiances being formed. In turn these new alliances, may continue creating new conflicts and flashpoints around the globe, thus uncertainty may be protracted in the medium to long term.
Disclaimer: This information is for educational purpose only and should not be considered as an investment advice or investment recommendation.