Geopolitical Uncertainty leading to Weak Economy

Geopolitical uncertainty introduces risks and unpredictability into the economic environment. Businesses and investors tend to prefer stability and certainty to make informed decisions and plan for the future. When geopolitical factors create an unstable and uncertain environment, it can weaken economic performance and growth prospects. Resulted, storm clouds are looming over the global economy.

Under financial globalization, in view of ever-changing factors of the external economic and geopolitical environment, the modern economy dictates new rules of conduct at all levels, which results in the revision of conventional financial theories.

The global economy is heading for its weakest medium-term growth in more than 30 years as the world grapples with geopolitical fragmentation, slower labour force growth and weaker prospects for previously fast-growing economies such as China, the International Monetary Fund (IMF) warns in its latest World Economic Outlook.

Geopolitical uncertainty has led to weak economic conditions, when there are growing uncertainty or instability in the geopolitical landscape, which we are witnessing several adverse effects on the economy:

The combination of high inflation with central bank policy uncertainty creates this environment of really high risk and volatility. With this, Investor Confidence has reduced with the growing conflicts, political instability, or trade disputes. This has further led to a slowdown in investment, reduced capital flows, and a decline in overall economic activity.

Resulted Trade Disruptions, such as the imposition of tariffs, trade barriers, or sanctions. These measures have disrupted established trade patterns, increase costs for businesses, and reduce market access. Reduced international trade has negatively impacted economic growth, especially for export-dependent economies.

Second most important is supply Chain Disruptions:, with this there is increasing costs, production delays, and decreased efficiency, ultimately affecting businesses and consumers. It has increased volatility in exchange rates. Currency fluctuations resulted De-dollarisation, has impacted import and export costs, foreign investments and finally, the uncertainties have influenced government policies and decision-making.

There are currently two macroeconomic forces affecting the market: high inflation and weakening global growth projections with geopolitical risks. However, a strong tailwind, particularly in the Indian markets from a rising return-to-office, resilient IT-BPM revenues (until the Dec-22 quarter), resilient macroeconomy etc., is keeping domestic sentiments positive.

The rising geopolitical tensions from issues such as the war in Ukraine and Brexit are leading to fragmentation of the global economy that could increase financial stability risks. This could hit cross-border investments, asset prices, payment systems and banks' ability to lend.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA