The impact of geopolitical risks on the global economy

Geopolitical risks deeply affect many economic indicators, primarily through energy prices.

For this reason, the impact of geopolitical risks on the economy has now become a test.

So, through which channels do geopolitical risks affect the economy?

GEOPOLITICAL RISKS, INTEREST RATES, AND INFLATION

While geopolitical risks influence the global economy through interest rate decisions, they also directly affect the momentum of the disinflation process being implemented in Türkiye's economy.

Rising production costs due to higher energy prices carry the risk of increasing inflation expectations.

On the other hand, because the acceleration in inflation forces the continuation of tight monetary policy, this narrows the central bank's room for maneuver in interest rate decisions.

It is clear that rising energy prices will also have a significant impact on today's interest rate decision.

GEOPOLITICAL RISKS AND THE CURRENT ACCOUNT DEFICIT

Upside risks in energy prices, particularly in oil, have a critical impact on imports and thus on the increase in the current account deficit for energy-importing economies like ours.

The exchange rate pressure caused by the current account deficit is also an important factor triggering inflation.

GEOPOLITICAL RISKS AND CREDIT RATINGS

Economic imbalances caused by geopolitical risks affect the rating behavior of credit rating agencies.

This will clearly make it more difficult for many import-dependent countries, especially those dependent on external energy, to find suitable funds in the markets to finance their rising current account deficits.

Due to geopolitical risks, the risk premium (CDS) of countries rises, especially because of international capital outflows from emerging economies.

This will both put pressure on the exchange rate and increase countries' borrowing costs in international markets.

GEOPOLITICAL RISKS AND ECONOMIC GROWTH

The most negative impact of geopolitical risks on the economy will undoubtedly be the slowdown in domestic demand, caused by the uncertainty it creates, and consequently a slowdown in economic growth.

The slowdown in economic growth increases further especially when foreign trade loses momentum.

Most importantly, when central banks are forced to halt interest rate cuts or raise rates due to geopolitical risks, economic growth will slow even further, and economies are likely to enter a recession.

For this reason, increases in oil prices due to geopolitical developments will be a fundamental determining factor in both the central bank's interest rate decisions and economic growth expectations.