2. Macroeconomic and
Geopolitical Considerations

2. Macroeconomic and Geopolitical Considerations

The post-pandemic global economic recovery has been hobbled by a range of interconnected macroeconomic and geopolitical factors.¹⁵
On the macro front, the unprecedented run of record-low interest rates ended¹⁶with central banks raising rates seeking to control inflation, which in turn has been further fuelled by geopolitical factors – including the war in Ukraine and maritime threats in the Red Sea – and their impact on commodity, energy, shipping and insurance prices.¹⁷

GEOPOLITICS: GAME-CHANGER

As economies around the world struggle with slowing growth, geopolitical tensions are widening the fissures that were already developing in longstanding international relationships.¹⁸ One of the biggest roadblocks to the global economic recovery is the war in Ukraine. Apart from triggering a humanitarian crisis, the conflict is contributing to inflationary trends worldwide, as the supply of key commodities such as oil and gas, as well as food staples such as wheat and rice,¹⁹²⁰ have been disrupted.

The situation is further complicated by the fraying US–China relationship, leading other economies – large and small, developed and emerging – to turn inwards or to regional allies. In a sign of trade flows affected by geopolitics, European ports have seen a drop in volumes partly attributable to the Ukraine conflict,²¹ while Chinese exports to ASEAN, the US and EU fell 10%, 17% and 7%, respectively (YoY), and exports to Russia leapt 117% in the second quarter of 2023.²²

“The big supply-chain game-changer from a geopolitical risk perspective is the Russian invasion of Ukraine. Over the near- to medium-term, we need to be mindful of such low-likelihood, high-impact events, particularly in light of recent events in the Middle East. Then there is the obvious one: China–US relations.”

Cameron Mitchell – Head of Geopolitical Risk, ANZ

Amid this backdrop, the quest for economic security means an increasing number of countries are favouring bilateral trade over multilateral trade, and nationalistic industrial policies are the order of the day. The US has moved to restrict the export of certain technologies to China, pumping in nearly US$300 billion to boost domestic semiconductor manufacturing capacity under its CHIPS and Science Act.²³ Other advanced economies like Japan, South Korea and the EU have similar policy frameworks, while China has moved to control access to gallium, germanium and graphite, which are key raw materials for the semiconductor and wider electric vehicle industries.²⁴

World Economic Outlook January 2024

Semiconductor concentration

Rising geopolitical tensions and foreign direct investment fragmentation

As these retaliatory moves threaten to snowball, it will accelerate nearshoring and friend-shoring trends globally as companies seek to mitigate geopolitical risks by relocating supply chains. These shifts will also be dictated by the formation of fresh alliances, such as those emerging between parts of Asia, Africa and the Middle East, even as the US, EU and their allies rebalance their relationships with China.

Indeed, discussions about reshoring and friend-shoring are on the rise, as analyses of earnings-call transcripts reveal²⁵ – matching the results of another study showing a rise in friend-shoring since late 2022.²⁶ That said, despite signs that decoupling of the US and Chinese economies is picking up,²⁷ a complete rift is unlikely given the interdependence of both economies and their strong trade links following years of globalisation: China remains America’s third-largest trading partner behind Canada and Mexico.²⁸Nor will other countries find it easy to disengage fully given China’s manufacturing prowess and its hold on the global supply chain. This reliance has led to a pick-up in the diversification strategy known as “China Plus One”, where companies look to complement their China-based production and supply hubs with alternatives in Asia.

That list includes countries like Vietnam, Thailand and Malaysia. Mexico also stands to benefit due to its proximity to a large market like the US, while Australia and Canada will look to fill supply gaps in the critical materials space, says Mitchell. India, too, should gain with its recent spate of business-friendly reforms and its positioning as a democratic counterbalance to China in the region.

Companies’ primary approach to reconfiguration and their motivations

MACROECONOMICS: THE MONETARY POLICY CONUNDRUM

While politicians ink trade pacts with an evolving roster of allies, central bankers continue to battle inflation while trying to keep recession at bay. While their efforts are having an impact,²⁹ a reduction in interest rates may still be some time away.

In the US, where the Federal Reserve raised interest rates to a 22-year high in July,³⁰ a policy pivot might not happen until the middle of 2024, says Richard Yetsenga, Group Chief Economist, ANZ. In the UK, the Bank of England’s fight against inflation – including 14 rate hikes in 21 months – sent mortgage rates to a 15-year high.³¹Meanwhile, in markets like Australia and New Zealand, which haven’t moved as aggressively as the Federal Reserve, interest rate cuts are even further away.

High interest rates increase the vulnerability of companies by exacerbating their debt burden, which can have knock-on effects across the supply chain. For instance, a growing number of companies around the world say late payments are on the rise,³² as businesses deal with the rising cost of capital and liquidity constraints.³³ANZ is also seeing its institutional clients using free cash flow and cash on hand to reduce their working capital debt, and more closely scrutinising their future funding requirements.

Yet, even as central banks juggle short-term stability considerations with the longer-term impact of inflation, the view is far from dire, Yetsenga says. Financial stress is more localised than during the 2008–09 financial crisis and household balance sheets are stronger in most major markets, including the US, Australia, New Zealand and South Korea.

At the same time, emerging market powerhouses like China and India continue to compete for investors’ attention.
Foreign direct investment (FDI) flows into China grew 5% to US$189 billion in 2022, while Malaysia attracted US$17 billion, a record jump of 39%. Meanwhile, Singapore received US$141 billion – an 8% rise – while FDI flows to India rose 10% to US$49 billion.³⁴

In short, while a full-blown crisis is unlikely, a global slowdown in the near term cannot be ruled out. Consequently, policymakers will need to act quickly to fend off further instability in individual institutions by directing additional liquidity where it is needed, and balancing both financial stability and price stability.³⁵

“China’s trajectory has increasingly been questioned, which will have similarly large impacts on the rest of the region, where people will just naturally canvass other markets. And while India is not a replacement for China, it’s definitely attracting more interest than has been the case historically.”

Richard Yetsenga – Chief Economist and Head of Research, ANZ

Debt in vulnerable firms by country

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