There is not much time left to close the fourth year of this decade. It is undoubtedly a very turbulent period, full of difficulties and “black swans”. In March 2020, a global pandemic left all kinds of traces, including economic ones. In February 2022, Russia attacks Ukraine, starting a bloody war that continues today. More recently, on October 7, Hamas terrorists carry out a brutal chain of attacks in Israel, to which Israel responds with force. A geopolitical tension of great magnitude began. The social and economic impact of the conflict will depend on whether or not it escalates to other countries (Iran, Syria, among others). These next few days will be critical.
Concern seems extreme, as President Biden’s visit to Israel this week has shown. Market signals have been calmer than expected, with only impacts on volatility and oil prices. And also in the sovereign bond markets, which were already coming from a very complicated September.
These severe geopolitical shocks are negatively affecting the economy since the end of the pandemic. Problems in the global supply chain following the return to normalcy after covid and the pull in global demand after more than a year of restrictions and confinements pushed prices up. Inflation started to become an issue. Initially it was misinterpreted as transitory.
The war in Ukraine and its impact on gas, oil, grains and many other commodities generated inflation that then became persistent. Central banks began to react and how: sharp and rapid interest rate hikes. Now that inflation has been substantially lower than in 2022 -although with a certain tendency to rise again- this latest unpredictable shock has arrived, with a potential impact of great magnitude on the global economy, as the previous shocks have had. We have to wait. We are at the moment of greatest tension. Perhaps, if there is no escalation in a few weeks, the worst may also be over.
The environment in which the new conflict in the Middle East has arrived was already complex due to the effects of the decisions and announcements of the central banks (ECB, Fed) on the sovereign bond markets, particularly the US. This week has been very busy for US debt, which has risen significantly.
The threat of an escalation of war does not help. That inflation may pick up due to energy prices, in a context of economic strength in that country, suggests that the Fed may continue to raise rates. Or at least keep them higher for considerably longer than expected. Turbulence is in sight, from which the euro zone will not be spared – with a notable slowdown that may increase as the effects of rate hikes are felt more strongly – and in which the ECB will also have a lot of work to do in an environment that is so difficult to manage.