• Geopolitical volatility is increasing. EIU’s dataset shows that the rise in inter-state tensions has been most pronounced in Europe, but all regions have been affected.

• Volatility is here to stay. Our economic outlook points to further changes in the global distribution of power that will weaken US primacy and lead to a more competitive, fragmented world. 

• The new geopolitical era will have significant implications for companies and investors. This will include higher inflation and interest rates, changed fiscal priorities and intense state-led technology competition. 

Global politics is becoming more volatile, creating uncertainty but also opportunities for businesses and investors. We have been tracking political and geopolitical stability for decades, compiling quarterly risk assessments for 180 geographies. Our dataset shows a clear rise in the threat posed by international tensions between states over the past 15 years. In 2010 we assessed that nearly 50% of our surveyed geographies faced “no” or “low” threat from such tensions; that proportion has now halved to 25%. Managing geopolitical risk has quickly moved up the agenda for governments and companies. 

Geopolitical pressures are being felt across the world

The increase in tensions has been global, but is most pronounced in Europe. In 2010 Europe was a zone of peace—30 of our 54 geographies surveyed were deemed to have “no/low” threat of disruption from international disputes, with the prospect of another war on the European continent almost inconceivable. In a marked reversal, by 2023 that number had fallen to just four, as Russia’s annexation of Crimea in 2014 and its invasion of Ukraine in 2022 upended its relations with the EU and its immediate neighbours. The unravelling of Russia’s ties with most of the continent means that businesses operate in a much-changed environment and European economies are exposed to new economic and security risks.  

The emergence of an intense geopolitical rivalry has weighed on our scoring for China and the US. In 2010 their economies were assessed to have, respectively, “moderate” and “low” exposure to international disputes. That had deteriorated to “high” (for China) and “moderate” (for the US) by 2023, as the two countries had deployed punitive economic and financial measures against each other in a widening rivalry. The troubled US-China relationship has been a contributing factor to a broader rise in international tensions in Asia, with the two superpowers using a mixture of inducements and coercive tactics to further their interests in the region. Tensions in relation to the Himalayan region, East China Sea, South China Sea and Taiwan Strait have become more pronounced as a result. Of 29 surveyed geographies in Asia, 15 had “no/low” threat from international tensions in 2010, which had fallen to 8 in 2023.

Emerging markets do not offer a straightforward solution in terms of avoiding geopolitical risk. The non-aligned foreign policies of many emerging economies can be helpful in reducing their exposure to geopolitics, but many have still experienced an escalation in international tensions. Our scores for the Middle East and Africa have been subject to less change than other regions since 2010, although in many ways geopolitical volatility has been a long-standing norm for much of the region (as recently demonstrated by the Israel-Hamas war). Nearly 50% of our surveyed geographies in Latin America are classified as having “no/low” threat exposure—higher than any other region. However, the region’s scoring has still deteriorated since 2010. Mexico, Nicaragua and Venezuela are examples of markets that we have downgraded, as domestic political changes have led to strains in ties with the US. 

Finding safe havens in an era of geopolitical contestation will be challenging, but not impossible. Although no region has avoided a rise in tensions at the aggregate level, each has countries that have been able to distance themselves from the forces roiling international politics. Influential economies that we assessed to face “no/low” threat from international tensions at end-2023 included Indonesia, New Zealand and Singapore (Asia); Ireland, Norway and the UK (Europe); Brazil and Chile (Latin America); and Nigeria, Qatar and South Africa (Middle East and Africa). Adroit international diplomacy, involving careful balancing of relations with major powers, has given some of these markets an advantage and improved their prospects of attracting investment. 

Tensions are a product of shifts in the global balance of power

Changes in the global distribution of power have driven geopolitical tensions. US primacy is no longer as absolute as it was in the 1990s and early 2000s, weakening the US’s ability and resolve to act as the “world’s policeman”. Rising powers, such as China, are seeking greater global influence, whereas other state and non-state actors sense an opportunity to act disruptively. Geopolitical rivalry has hamstrung the ability of international organisations, such as the UN and the World Trade Organisaton (WTO), to mediate security and trade disputes. Syria’s civil war has shown how the widening internationalisation of armed conflicts, as more external parties seek to influence outcomes, makes them harder to resolve. 

Businesses and investors should expect more geopolitical volatility in the future. Concerns of the emergence of a global war or even nuclear conflict are overblown: there are few signs of a rival axis emerging to fundamentally challenge the US and its allies (China and Russia relations are not as strong as might be assumed). A diminished economic outlook for China, whose nominal GDP we no longer expect to surpass the US’s by 2050, also raises questions about its ability to outcompete its rival. Nevertheless, our economic outlook still points to a further diffusion of global power that will provide emerging, non-Western economies with greater influence. This will drive tensions between those that seek to maintain the international rules and institutions that have been in place since 1945 and those that would like to change them.

Economic consequences will influence companies and investors

Power competition and shifts will have a profound impact on investors. Periods of geopolitical change have historically driven important changes in economic outcomes. We forecast an impact from the current geopolitical environment in several major areas:

Prices and rates 

• Geopolitical competition will be inflationary. A reworking of supply chains, as countries aim to “reshore” or “friendshore” critical areas of production, will lead to higher prices as efficiencies are lost. Restrictive trade policies and the building of strategic commodity reserves will add to price pressures.

• Outright regional or global conflict would lead to price spikes, owing to demand and supply shocks. War tends to be inflationary because of the demand associated with the war effort and the use of expansive monetary policy tools to fund it. 

• Higher trend inflation will keep a floor under interest rates, reinforcing our view that we have entered a period of more elevated rates (compared with the 2010s). 

Public and private spending 

• Geopolitical competition will encourage governments to prioritise defence and industrial policy needs in their spending; this has already been evident in US and European responses to Russia’s invasion of Ukraine. This will be at the cost of social programmes in areas such as health, education and housing.

• Changing fiscal priorities may lead policymakers to consider making greater use of the private sector to provide key public goods. In general, however, private investment will be constrained by geopolitical uncertainty and high borrowing costs.

• Fiscal retrenchment is unlikely in the current environment, as governments find it politically difficult to raise taxes to meet new spending pressures. These factors point to persistent budget deficits and high bond yields. In a major conflict scenario, however, yields would be pushed down by demand for safe-haven assets.

Productivity and technology 

• Competition between countries has historically been a driver of technological change. The desire to be at the forefront of international innovation will drive public funding in productivity and technology, and create opportunities for private players, especially in national defence applications.

• Artificial intelligence (AI) will be a focus of developments in the current environment, given global competition and regulatory divisions over the approach to be taken to the sector.

Absent outright conflict, changes in the global distribution of power tend to occur gradually. Nevertheless, recent conflicts in Europe and the Middle East give a sense that shifts in geopolitics are occurring unusually rapidly at the moment. Understanding the implications of this new era of geopolitics will become increasingly fundamental in investing, both to protect against unexpected risk and to find opportunity.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.