Each year the Economist Intelligence Unit (EIU) compiles a list of what it sees as the top ten global risk scenarios that could reshape the global economy in the coming year. As well as looking at economic and political issues, this year in particular they explore military and environmental risks.
The EIU also assesses each of the risks against the scales of likelihood and impact. Their overall matrix is shown below. Fortunately, none make it to the very high likelihood/very high impact category.
Their first risk, in the high likelihood/very high impact category is that a cold winter exacerbates Europe’s energy crisis. They describe this as “political”. With Russia having cut off gas supplies, European countries are at risk of exhausting their reserves if the winter weather is particularly bad. This would lead to energy rationing bringing industry to a halt and creating a deeper recession, lasting into 2024. In the extreme, poverty would increase and EU solidarity could break down. Certainly there are extreme scenarios to explore here, but recent winters have tended to be milder, and countries are currently claiming that stocks are high. That said, the UK Government and energy industry have war-gamed rolling blackouts. Longer term this risk should diminish as reliance on gas declines.
In the high/high category, the EIU place extreme weather adding to commodity price spikes, fuelling global food insecurity. The droughts and heatwaves of 2022 and the effect of the Ukraine war on grain supplies have already raised prices. More extreme weather events are increasingly likely – inevitable – whatever the progress to Net Zero (which is not looking good). Despite these obvious threats, forward planning for this scenario seems sadly lacking – if not next year, then soon this scenario will soon become very likely and dangerous.
The only one assessed as “Very high” likelihood, high global inflation fuelling social unrest is perhaps a risk worth paying close attention to. Global inflation is higher than for many years. Governments are focussing on attempting to keep wage rises lower, concerned about a continuing spiral. This could easily lead to widespread protests from poorer people or at least a series of major strikes – even in the UK a General Strikehas been mooted. The EIU have this down as only a “Moderate” impact. But surely it is a fundamental threat to the global economic model, requiring a major shift – say to a radical Keynesian approach – or economic breakdown, or authoritarian repression?
Three risks make it into the High Impact/Moderate Likelihood category:
- Direct conflict erupting between China and Taiwan, forcing US to intervene: even at the level of simple blockade, a China/Taiwan conflict would blow apart industry globally as semi-conductor supplies disappear. A full-blown military conflict, directly with the US and other allies is almost too dreadful to contemplate (US wargamers once concluded that Taiwan could not be defended) – which is perhaps why this is rated as only “moderate” likelihood.
- A new variant of coronavirus, or another infectious disease, sends global economy back into recession: maybe only “moderate” likelihood in 2023, this is certainly a much higher risk over a 10-year horizon. If current vaccines are inadequate to deal with the new outbreak, lockdowns and recession could well follow. SAMI’s risk analysis broadens this threat into a “Covid for crops” – widespread food shortages following a new disease.
- Inter-state cyberwar cripples state infrastructure in major economies: with the costs of direct conflict being too high, cyber-warfare becomes more likely. Attacks on critical infrastructure such as the National Grid would be devastating for the economy. Lower impact attacks probably have a higher likelihood.
Lower impact and likelihood risks identified include further deterioration in West-China ties forcing full decoupling of global economy, aggressive monetary tightening leading to global recession, and China’s zero-covid policy leading to severe recession. These variants on other risks seem more likely than the EIU assessment, simply because they don’t require major step changes, and are just continuations of current trends.
The final risk, although assessed as “very unlikely” is also “very high impact”: the Russia-Ukraine conflict turns into global war. Escalation of the war becomes more likely as Russian positions are more threatened. Already UK special forces are being accused in participating in an attack on the Russian fleet. Infiltrations in the Baltic states or Finland could easily cause over-reactions. Threats of – or “false flag” operations – nuclear “dirty bomb” attacks also raise the levels of tension. Whilst even tactical nuclear weapon use seems very unlikely, the risk remains that miscalculations occur.
Taken together, these risks suggest that “business as usual” or returning to a “new normal” are actually some of the least likely outcomes of the coming few years. Planning for tougher times ahead never seemed more essential.
Written by Huw Williams, SAMI Principal
The views expressed are those of the author(s) and not necessarily of SAMI Consulting.
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