In this weeks edition of Geopolitics & the Day After, we examine a myriad of developments that may prove to be consequential for 2024. First, we discuss China’s reaction to Taiwan’s recent presidential election and the consequences for the global economy should China and Taiwan go to war. Then we move to an analysis of the rocky expectations for financial markets, driving by record-high debt and market uncertainties. We then look at the threat of expansion of the Israel/Hamas war for the wider region. We finish this week’s newsletter by looking at two prospects for growth in 2024: Sub-Saharan Africa and India.

What Will China Do Next?

Xi, Biden, and the $10 Trillion Cost of War Over Taiwan

Jennifer Welch, Jenny Leonard, Maeva Cousin, Gerard DePippo, and Tom Orlik, Bloomberg

Analysis: Xi Jinping’s ambition to unify Taiwan motivates military purges

Katsuji Nakazawa, Nikkei Asia 

China Failed to Sway Taiwan’s Election. What Happens Now?

Damien Cave, The New York Times

Days before Taiwan’s presidential election, China sent a rocket over Taiwan that seemed to reiterate its warnings that a vote for the Democratic Progressive Party was a vote for war. Taiwan’s voters ignored these warnings on Saturday, and handed the presidency to a party that promotes the island’s separate identity from the mainland for the third time in a row. This confirms that the boisterous democracy has moved even further away from Beijing and its dream of unification. China’s pressure tactics are likely to increase in response. President Xi has recently launched another anti-corruption effort at China’s military to secure all available military options toward Taiwan and to stave off reports that the People’s Liberation Army is not ready to fight in a major war.

These tensions surrounding the election in Taiwan highlight the potential for a conflict that would decimate the global economy. Bloomberg Economics estimates that a war in the Taiwan Strait would cost around $10 trillion, equal to about 10% of global GDP. The biggest hit would come from missing semiconductors, which are critical to today’s increasingly digitized world. Factory lines producing laptops, tablets and smartphones – where Taiwan’s high-end chips are the irreplaceable “golden screw” – would stall. Other sectors that use lower-end chips would also take a significant hit. Several businesses are already moving to hedge these risks, citing geopolitical tensions as “adding incentive to scale back investments at a faster pace.”

Debt Deluge Meets Market Jitters

The Bond Market Rally Is Overlooking a Soaring $2 Trillion Debt Problem

Anchalee Worrachate, Liz Capo McCormick, & Garfield Reynolds, Bloomberg

The 2024 financial market rollercoaster

The editorial board, Financial Times

2024 has ushered in a starkly different climate of trepidation and uncertainty in contrast to 2023’s euphoria. The vision of a surefire soft economic landing and aggressive rate cuts has soured due to the S&P 500’s post-holiday wobble. Central banks have to carefully balance between taming inflation and triggering a recession. Adding fuel to the fire is a global debt deluge. Governments, burdened by the aftershocks of pandemic stimulus and skyrocketing costs, are issuing record amounts of debt. The staggering $2.1 trillion tidal wave of debt issuance is flooding the market and threatens to overwhelm investor appetite and send yields upwards. The uncertainty driven by elections in key countries like the US complicates financial markets even more. Despite the worry, there are some potential bright spots: The possibility of lower interest rates, a global economy with surprising resilience, and technological advancements in AI could still provide an upward lift for markets. 

Conflict is Spreading Outside of Gaza

After 100 Days, Israel-Hamas War Threatens to Spill Beyond Gaza, Disrupt Global Trade

Rory Jones, The Wall Street Journal

U.N. Warns Gaza Is Heading for Famine as Specter of Wider War Looms

Declan Walsh & Raja Abdulrahim, The New York Times

Why US strikes in Middle East are rekindling fears over oil and inflation

Sam Fleming, Aiden Reiter, & Delphine Strauss, Financial Times

Iran and Saudi Arabia Battle for Supremacy in the Middle East

World Politics Review

100 days after the beginning of Israel’s retaliation against Hamas for the terrorist organization’s brutal attacks on October 7th, there is still no clear end to the conflict, which threatens to expand to the region and disrupt global commerce. Over 23 thousand Palestinians have been killed in the fighting, per Palestinian authorities. Around 70% of Gaza’s homes and half its buildings have been damaged in the fight, and the specter of famine lingers. Humanitarian convoys carrying food, medicine, and other essentials have barely been able to enter Gaza, and experts say that the risk of famine in Gaza is greater than anywhere else in the world. Refugees crowded in too few shelters in the south of the Gaza Strip create conditions ripe for widespread disease outbreaks.

The conflict is spreading outside of the Gaza Strip. Yemen’s Houthis, backed by Iran, have launched attacks on maritime shipping in the Red Sea with the stated goal of cutting support to Israel, despite many of the vessels having little to do with Israel. Shippers are having to reroute around the Cape of Good Hope, a journey that adds 7-20 extra days, increases inflationary pressure on goods around the world, and makes commodity prices, such as oil, more volatile. The US and allies have conducted strikes against Houthi targets in retaliation for this disruption of international commerce, and Secretary of State Antony Blinken has made multiple visits to the region in an attempt to contain the war from widening into a regional conflict, with Iran in mind. Tehran funds Hamas, Hezbollah in Lebanon, the Houthis in Yemen, and many other groups that work to fulfill Iranian foreign policy interests: namely, to create an “Axis of Resistance” against Israel, the West, and its longtime regional rival, Saudi Arabia.

Sub-Saharan Africa and India to Be Hotspots for Growth

African Nations Dominate Top 10 Economic Growth Spots in 2024

Alister Bull & Monique Vanek, Bloomberg

How strong is India’s economy under Narendra Modi?

The Economist 

Emerging markets are again showing some promise for 2024. Despite facing significant headwinds like debt burdens and slowing global growth, Africa offers some hope. Six Sub-Saharan countries are predicted to be among the world’s top 10 performers in 2024, driven by diversification and foreign investment. Though not enough to offset slower growth in giants like South Africa and Nigeria, these bright spots contribute to a regional growth projection of 4% for 2024, an improvement over 2023. While long-term prospects are bolstered by reform efforts in major economies, immediate concerns remain – high debt, limited access to foreign capital, and potential vulnerability to a China slowdown. Still, this growth will help make a measurable difference in the world’s poorest region.

Africa isn’t the only bright spot for growth in 2024. In 2023, India’s economic growth beat almost every forecast, and economists estimate an annual growth rate of over 6% for the rest of the decade. Many Indians attribute this growth to the leadership of Narendra Modi, the country’s two-term prime minister who is likely to win a third during this year’s election. While the country’s weak labor market and poor private sector investment have been lackluster, this may be changing due to reforms initiated by Modi. His stated goals are to formalize the economy, to make doing business easier, and to bolster domestic manufacturing. In terms of formalization, reforms such as digitization and better record-keeping have made it easier for the state to relieve poverty and pass out welfare (worth around 3% of GDP per year) efficiently. At the same time, poverty rates have fallen dramatically. In easing business transactions, a national goods and services tax collected the fragmented state-level regimes across the country and homogenized them, cutting an enormous amount of red tape. For manufacturing, India has implemented subsidies for products made in India and has pledged $10 billion for semiconductor companies to build plants in the country. This has been less successful, although firms wanting to “de-risk” their exposure to China may soon turn that around. While the long-term effects of these policies are yet to be seen, the more immediate result is likely to be Modi winning his third term as prime minister this year in the country’s general elections.