Geoeconomic fragmentation and a disordered world

London Business School’s Dr Linda Yueh gave her reflections on the global economy in 2023 while also devoting thoughts on the geoeconomic prospects for 2024 in a recent discussion she had with Sirius XM business news anchor, Janet Alvarez.

What were some of the biggest surprises in 2023? For Dr Yueh, one of the biggest surprises came in the sheer speed of the mid-tier banking collapse at the beginning of the year in the US.

“It was surprising to see the speed at which the knock-on effect of the failure of the Silicon Valley Bank (SVB) led to an impact on regional banks in the US,” said Linda.

The speed at which the crises unfolded was unexpected, with SVB announcing a plan to raise capital on Wednesday March 8 but then was placed into receivership on Friday March 10. Signature Bank (SBNY) failed two days later.

Jitters in the US banking system eventually spilled over into Europe with the buy-out of Credit Suisse, one of Switzerland’s leading banks, by its traditional rival, UBS. Once again, the speed of events took the banking community and investors by surprise, taking just a single day following comments from its largest shareholder, for Credit Suisse to announce it would take a CHF 50bn loan from the Swiss central bank.

In a world in which depositors handle both money and information digitally, the rapidity of withdrawals made from these banks meant that the swift turn of events was unexpected, which made the rapid response of central banks particularly important in stemming the contagion, a lesson that Dr Yueh highlights in her latest book, The Great Crashes: Lessons from Global Meltdowns and How to Prevent Them.

While discussing the impact on the business community in 2023 that global economic factors such as high inflation and interest rates, together with the war in Ukraine and the more recent crisis in the Middle East, Dr Yueh was asked if she anticipated a de-escalation in political conflicts around the world.

“Going into 2024 there is always the hope that there could be some degree of de-escalation,” said Dr Yueh. “However, with more than half the world’s population going to the polls in India, UK, Taiwan and the US, we could witness a change of course in terms of economic policy. What immediately comes to mind in such cases could be adjustments to supply chains and the possible impact that all of this uncertainty will have on business investment.”

Set within the context of a global community arranged by multi-alignment, or multiple poles of contrasting power that are in many instances yet to settle on the terms of their economic and political engagement, Dr Yueh said that the potential for growing economic uncertainty would remain an important factor in the coming year.

One of the most common issues in times of a challenging global economic and political environment is how to cope with high levels of uncertainty. At the macroeconomic level, uncertainty hinders the decision-making process for governments, can delay investment decisions, and can pause spending by households and companies. To this end, Dr Yueh observed, governments, central banks and leading institutions have begun to add ‘nowcasting’ models to their approach to decision-making.

Nowcasting makes it possible to fill the gaps arising from the lag in the publication of macroeconomic indicators allowing central banks to monitor real-time signals of movements in GDP.

The late great economist, John Kenneth Galbraith once said that “forecasting is a notoriously underpaid profession, and extremely risky to boot, so I avoid it”. By comparison, ‘nowcasting’ is forecasting based on current or even real-time data, looking at potential trends and scenarios.