- World Economic Forum warns on AI misinformation
- Eurasia Group says a Trump return could knock US investment status
The eruption of active hostilities in some regions coupled with underlying geopolitical tensions in others is contributing to a more “unstable global order characterised by polarising narratives, eroding trust and insecurity”, the World Economic Forum (WEF) has warned, ahead of a year in which Donald Trump’s possible return to the White House is also raising concerns.
Around 3bn people are set to head to the polls this year as elections are held in Bangladesh, India, Indonesia, Mexico, Pakistan and the UK as well as the US, and the Davos organiser has highlighted artificial intelligence (AI)-generated misinformation as the biggest short-term threat in its annual Global Risk Report.
Easy access to large-scale AI models “has made it so much easier to reach a large population of voters [and] to also create content that may feel real, even though it is not”, Carolina Klint, chief commercial officer for Europe at Marsh McLennan, warned at the report’s launch in London.
Extreme weather events, societal polarisation, cyber insecurity and the threat of inter-state armed conflict make up the remaining top-five risks over the short term, with lack of economic opportunity coming in sixth. This was the first time that dwindling economic mobility – in both developed and emerging markets – was identified as a significant global risk in WEF’s annual survey.
Geopolitical risk consultancy Eurasia Group cited the US election as the biggest source of risk for 2024.
Although financial markets welcomed Donald Trump’s first election win in 2016, a second term would “raise foundational questions about the long-term stability of the US as an investment destination” and the trustworthiness of its financial promises, it argued.
The US election, Russia’s ongoing war with Ukraine and Israel’s military occupation of Gaza are similar in the sense that they are confrontations between two sides that see each other as an “existential threat”, Eurasia Group’s president and founder Ian Bremmer said.
“In none of these cases do the leaders have an ability and a willingness to bring the wars to a close.”
Indeed, the failure to even share “basic views” about the nature of the disputes means there are no “guardrails” limiting their scope, Bremmer said.
Take freight
This can already be seen in the Middle East, where Houthi attacks on shipping vessels in the Red Sea have led to the major container lines re-routing services around the Cape of Good Hope. In recent weeks, the cost of shipping a 40ft-equivalent container from East Asia to northern Europe has increased by 147 per cent to over $4,000 (£3,142), according to data provider Freightos. Surcharges ranging from $500 to $2,700 mean the all-in cost of moving freight is much higher, the group said.
Increased shipping costs alone are unlikely to spur a renewed surge in inflation, but tensions in the region create the potential for another energy price spike that could hamper central banks’ plans to roll back interest rates. Capital Economics’ market economist Diana Iovanel said this would “have negative consequences for the global economic outlook as well as most asset prices”.
Any broadening of the conflict to include the US or Iran would prove significant, Bremmer argued.
“I don’t know what the equity impact would be, but the oil price impact would be immediate, and it would be large,” Bremmer said.
Although global energy demand isn’t currently elevated and there is excess supply that could easily be provided by Saudi Arabia and other major Opec producers, a war involving Iran “does probably lead you to a global recession and it significantly increases the likelihood of a Trump win”, Bremmer argued.
The deglobalisation trend sparked by the US-China economic rivalry is also set to continue, with governments pursuing beefed up domestic industrial policies, introducing localisation mandates and imposing tighter controls over their own data and technology, Julia Coym from consultancy Control Risks said in a 2024 outlook.
Control Risks identifies China’s handling of its economic slowdown as the most significant global economic risk faced this year. Either way, with both countries primarily grappling with domestic issues, their relationship is likely to enter into a holding pattern this year, the consultancy said.
Jonathan Baird, a Canadian former fund manager who now publishes the Global Investment Letter, thinks all these factors lead to a more precarious investment landscape overall.
“I would say now that the geopolitical situation is the most fraught with risk – real and potential – since the second world war,” he said.
Markets have been driven higher by the “paradoxical notion” that central banks will soon start cutting rates even as the global economy avoids a recession, Baird added. Futures markets are currently pricing in 150 basis points in cuts by the US Federal Reserve between the January 2024 and 2025 meetings, Deutsche Bank macro strategist Henry Allen noted this week.
Historical precedent suggests that such a pace of rate cuts requires a recession and central banks are likely to adopt a more hawkish tone if one does not materialise. “We only normally seen that speed of cuts within a year around a recession,” Allen said. A year without recession could also bring on share price falls as rates stay high.
“If that [sentiment] bubble bursts, it could be a tough year for markets,” Baird concluded.
