26 June 2017

A “normal” environment is composed of geopolitical uncertainties

By Christophe Morel, Chief Economist and Thuy Van Pham, Economist

[Christophe Morel]


[Thuy Van Pham]









Our economic scenario is based on the premise of a robust global economic recovery that is still, almost certainly, underestimated in scale. Taking this “central” scenario as reference, we then formulate a “risk balance”, which consists in identifying the main factors that could induce us to revise it either upward or downward. Financial instability, the fall in the price of oil and geopolitical uncertainty are the main factors pulling downward.

To achieve an accurate apprehension of geopolitical risk as a specific factor, we must answer two questions: how do you evaluate it? And what are its economic implications ?


A “normal” environment is composed of geopolitical uncertainties

The measurement of geopolitical risk is in no way immediate. We have to rely on our credo: “words reveal reality”. In practice, we identify a certain number of keywords that are considered to illustrate geopolitical uncertainty, such as “war risk”, “terrorist threat” etc. Then, every week, we run a search of the Bloomberg database to count the number of articles mentioning these keywords.  Finally, we “clean” these statistics to remove various biases (especially, the upward trends in the overall number of publications).

This data mining has led us to make three main observations: i) our geopolitical risk indicator does provide a faithful trace of the major geopolitical events; ii) the period after September 2001 clearly constituted a rupture compared to the 1990s; iii) the resurgence of geopolitical uncertainty in 2017 is a result of the election of Donald Trump, with the ensuing uncertainties surrounding his foreign policy doctrine, and, more recently, the occurrence of new terrorist attacks.

A historical analysis points to the conclusion that the world has become more unstable geopolitically since the beginning of the 21st century. This conclusion is biased by the fact that our statistical work only began at the start of the 90s. However, we know that before the 90s, the international environment was marked by the Cold War (as is reflected by our counting indicator of the number of conflicts recorded each year since the end of the 2nd World War). In other words, the outlier in terms of geopolitical environment was not the period after September 11th, 2001, but the “abnormally calm” period of the 90s. From this point of view, a re-evaluation of geopolitical uncertainty is necessary : a “normal” environment is one of geopolitical uncertainties !

Geopolitical uncertainty is a downward factor in the short term, but a more neutral risk in the medium term

We have to be prudent when evoking geopolitical risk, partly because it very difficult to anticipate, and partly because its interactions with the economic environment are complex. The present geopolitical uncertainty must be integrated as a downward risk factor in our economic scenario in the short term, in particular because uncertainty persists regarding the new foreign policy doctrine of the United States. It is even possible that this doctrine will be tested at some time, somewhere in the world.

However, in the medium term, this geopolitical uncertainty should be considered as a more “neutral” risk :

–   First, since geopolitical uncertainties are ultimately “normal”, this norm will gradually be integrated into economic behaviour, barring the occurrence of an exceptional shock ;

–  Second, geopolitical uncertainties can modify the budgetary decisions of States. Our econometric analysis of causality suggests that armed conflicts statistically result in increased military spending, although there is no correlation in the opposite direction. So, every increase in the number of conflicts in the world would a priori lead to an increase in the weight of military spending, which could be favourable to growth in the medium term, provided that budgetary constraints do not lead to compensatory cuts in other spending. The extent of this trend would probably differ from country to country, given that the causal link to military spending is statistically clearer for the United States than for France.

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Source: Bloomberg – Calculations: Groupama AM                                                                                                


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Sources: Globalsecurity.org and Sipri – Calculations: Groupama AM



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