Economy

The "Perfect Storm" That Could Wreak Havoc On World Economy

Three key factors in the world's leading economies may slow growth again, and emerging economies could bear the brunt.

The "Perfect Storm" That Could Wreak Havoc On World Economy
Luis Carlos Vélez

BOGOTÁ â€" The world economy may soon face the realignment of three forces that would impact recovery and growth worldwide â€" oil prices, U.S. interest rates and China's economic activity.

This "perfect storm" for the economy must be viewed with care by authorities in the Latin American region, as well as worldwide, in order to minimize both the effects and duration. The reality is that another economic adjustment seems inevitable, and there are no magic pills to avoid it.

Oil

Crude prices continue to drop, without responding to any apparent market realities. The output from Arab states remains extravagant in scale in spite of the low prices, because their objective is not economic but geopolitical. Their interest is in lowering the value of crude so the United States will not have incentives to produce it, particularly through fracking. Producing shale gas would make no sense if the price of a barrel keeps falling. So, in a scenario where prices do not correspond to market conditions and the aim of the world's biggest producer is to push out its principal rival, smaller players will inevitably lose. In the "oil war" between the Arabs and the United States, those left stranded may well turn out be producers like Colombia, Venezuela and Ecuador.

Interest rates

The U.S. Federal Reserve will probably raise its rates before the end of 2015, which will prompt a reshuffling of the global investment portfolio. Money always flows toward the least risky assets with the highest relative returns. So the prospects of economic stability in the United States and finding one of the best rates of return will mean capital returning to one of its traditional safe havens. That will lower investment rates in developing economies and as we have seen in recent days, a significant fall in the price of assets like gold.

China

The Chinese economy is no longer booming. There are increasing signs that its more recent expansion was largely fueled by stock market and real estate bubbles. Recent weeks have grown dark as some of the main market indices have fallen 29% since a peak in June. Adjustment in China's growth forecasts will mean falling demand for raw materials, which again affects developing states that are among their main exporters.

The economic blow is inevitable, and it will be time to spend the reserves governments told us they'd been building up in the more prosperous times, for which they'd blamed the inability to lower our taxes. Now is the time to use them, because lean times are not thwarted by squeezing businessmen and the middle class.

The United States gave us a lesson in economic recovery, by creating incentives and protecting internal demand as a source of economic regeneration. Pressuring job creators and the middle class in times of crisis, is like smashing the engine of your economic vehicle.

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Geopolitics

Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3

-Analysis-

LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.


Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

commons.wikimedia.org

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

If nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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