Chart of the Week: Geopolitical Risk Index

Chart of the Week: Geopolitical Risk Index

Macro 4 minutes to read

Christopher Dembik

Head of Macro Analysis

Summary: Increased confidence that a Sino-US trade deal will soon be sealed is reflected in an easing of the Geopolitical Risk Index, a fascinating gauge of global tensions. But though it has fallen, the index remains at an elevated level.

The Geopolitical Risk Index is based on the work of D. Caldara and M. Iacoviello (“Measuring Geopolitical Risk”, working paper, Board of Governors of the Federal Reserve Board, 2017). The methodology is rather simple as it counts the occurrence of words related to geopolitical tensions in leading international newspapers. As far as I know, this is the only geopolitical risk benchmark that gives a historical perspective since it gets back to 1899.

The one-year average index has been falling since last September as trade tensions are less of a concern for investors. It currently stands at 140, which is back to where it was in Spring 2017, but it is still above its long-term trend since 2007 at 111.

The ongoing downward trend may continue in the short-term as the expected trade agreement between China and the USA should be finalised in coming weeks – insiders are talking about early June, but we are well aware it may be postponed again.

Despite the strengthening of US sanctions against Iran that will primarily affect China, it seems that negotiations are going fine. This week, Vice Premier Liu He will lead a Chinese delegation for additional discussions in Washington, starting on May 8. China seems committed – at least officially – to promote opening-up at a higher level, which would mean increasing goods and services imports on a larger scale and making more efforts to protect IP rights, as confirmed by China’s finance minister Liu Kun this past Thursday.

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