Geopolitics and ballpark estimates

MOST economists commenced 2022 with three key assumptions on the global economy: 1) Some policy normalisation and reversal, though cautious and uneven, are likely to occur in economies with above-average growth and inflation; 2) The Covid-19 infection wave, while presumably asymmetric and recurrent across countries, appears to have less of an imprint on cyclical activity on balance; 3) The lingering supply disruptions resulting from the pandemic, albeit still intense and widespread, should be easing gradually.

As such, the global GDP growth and inflation outlook was generally expected to mean-revert, but only partially, in 2022. Then on Feb 24, a major geopolitical conflict erupted in Europe, jolting financial markets and raising risk assessments across the world. Broadly, this conflict not only exacerbates supply disruptions but also weakens demand via various channels. Consequently, the global outlook - depending on the duration, magnitude and pervasiveness of the shocks - becomes uncomfortably foggy.

Although geopolitical risk is generally viewed as a crucial input to economic decisions, it is not easy to encapsulate, assess and map out its ramifications. One approach is to harness text-based measures and proxy indicators to provide ballpark estimates on the likely impact of geopolitical risk on headline growth and inflation.