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Russian President Vladimir Putin meets with Chinese President Xi Jinping in Samarkand, Uzbekistan on September 16, 2022. SPUTNIK/Reuters
Todd Hirsch is chief economist at Calgary-based ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economy Decline.
Thirty years from now, high school students will be learning an entire chapter about the events of 2022 in their social studies curriculum. The events of 2022 are the year when the global political order was rewritten and events began to take place in a situation that was unthinkable in the second half of the 20th century.
Of course, the geopolitical events we are currently unfolding had their origins long before 2022. Russia's invasion of Ukraine, China's stance around Taiwan, the Iranian revolution, North Korea's missile launches, and Saudi Arabia's appeasement with Russia. None of this is completely unexpected. But 2023 may be the year these events start to have an even bigger impact.
It would be a mistake to think that these developments are limited to politics. There are also economic effects. Geopolitical events in 2023 will push the global economy closer to a seemingly inevitable recession.
Consider the negative impact that war, or even the threat of war, has on consumer sentiment. The developed economies of North America and the European Union are largely driven by consumers. A news cycle that bombards us with dire reports from countries like Ukraine, China, and North Korea around the clock is squeezing enthusiasm for spending. With each update of sad geopolitical news, coupled with inflation, rising interest rates, and a weak stock market, consumer optimism sinks even lower.
Next is trade disruption. The world economy in the second half of the 20th century was built primarily on greatly expanded trade. From the birth of GATT (later the World Trade Organization) after World War II to the creation of major trade agreements such as NAFTA, the EU, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, our world Economy is trade.
But who is talking about trade deals today? Enough to let the former G8 countries (Russia) do well in the sandbox, apart from uniting with other countries to cooperate on trade deals. It's difficult. Global trade is certainly not over, but it may be in decline as the 21st century seems to be more about conflict than cooperation. And that would hurt all trading countries through loss of export markets, higher import costs, and lower production efficiency.
And it would be particularly confusing if the situation in Taiwan goes so far that Western countries such as Canada decide it is necessary to impose trade sanctions against China. Canada doesn't do much trade with Russia, so President Vladimir Putin's sanctions against Russia after the Ukraine war were relatively painless. But China is a completely different story. China is Canada's second largest trading partner.
Ultimately, geopolitical conflicts will also erode the economy through draining public spending. That means more tax money will be spent on tanks, missiles, and aircraft carriers, and less on more productive things like education, transportation infrastructure, and medical research.
NATO member states are expected to spend 2 percent of their GDP on the military. Few member states live up to that expectation. However, if geopolitics worsens in the coming years, member states will be forced to increase military spending. In Canada, for example, the Parliamentary Budget Office estimates that Ottawa will need to spend an additional $75 billion by 2027 to meet NATO requirements. This is a significant increase in public spending that will need to be financed by increased taxes, cuts in other spending, or additional public debt.
Deteriorating consumer sentiment, disruption to global trade, and increased public spending on defense are all likely to occur if global geopolitical developments continue along the trajectory set for 2022.
Businesses, industries, countries, and even individuals must prepare for potentially prolonged geopolitical conflict and the economic disruption it will bring.
