10 Risks That Could Crash the Global Economy in 2023

2. Extreme weather adds to commodity price spikes, worsening global food insecurity

EIU assessment: High probability; high impact

Climate change models point to more frequent extreme weather events. Although sporadic and regional thus far, these events could start to happen more synchronously and for prolonged periods. Already, severe droughts and heatwaves in the U.S., Europe, China and India in 2022 are contributing to rising prices of some foodstuffs.

The war between Russia and Ukraine, two of the world’s largest agricultural exporters, has led to huge price spikes and could create global shortages of grains and fertilizers, which are crucial for harvests, in 2023. The world could face a prolonged period of crop shortages and skyrocketing prices, raising the risk of food insecurity, or even famine.

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3. Direct conflict erupts between China and Taiwan, forcing U.S. to intervene

EIU assessment: Moderate probability; very high impact

A direct conflict between China and Taiwan is unlikely, but tensions grew when China conducted “targeted military operations” following Speaker of the House Nancy Pelosi’s August visit to Taiwan. Washington has reiterated that its diplomatic approach toward Taiwan has not changed, but China is increasingly skeptical of U.S.-Taiwan relations, particularly given the acute hostility toward China in the U.S. Congress.

The risk of a full military invasion is mitigated by China’s reliance on Taiwan’s semiconductors and concerns about the U.S.’s active response to Russia’s invasion of Ukraine. However, recent military exercises by China and a more aggressive Taiwanese response raise the risk of a miscalculation, which could spiral into a wider conflict that would wipe out Taiwan’s economy, including its semiconductor industry on which global supply chains rely. It would also risk drawing in the U.S., Australia and Japan, starting a catastrophic global conflict.

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4. High global inflation fuels social unrest

EIU assessment: Very high probability; moderate impact

Persistent inflationary pressures, caused by supply-chain disruptions and Russia’s invasion of Ukraine, have pushed global inflation to its highest level since the 1990s. If inflation rises much higher than wage increases, making it hard for poorer households to buy basic staples, social unrest could ensue. Such protest movements have been seen in India, Ecuador and Argentina.

In an extreme scenario, workers in major economies and employed by large manufacturers could coordinate large-scale strikes, demanding higher salaries that match inflation. Such movements, similar to those that have affected critical services in the U.K., could paralyze entire industries and spill over to other sectors or countries, weighing on global growth.

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5. New coronavirus variant, or another infectious disease, sends global economy back into recession

EIU assessment: Moderate probability; very high impact

Amid global vaccine inequity, the rollback of government policies and pandemic fatigue, EIU expects a new variant of COVID-19 to emerge in late 2022 or early next year. If it escapes immunity (despite a reformulation of vaccines), this could cause a repeat of 2020. And risks go beyond the coronavirus, with experts warning that other infectious diseases will soon emerge — as monkeypox did earlier this year.

If another aggressive variant of the coronavirus materializes, developed countries may impose lockdowns. Consumer and investor sentiment would sink, leading to a downturn in financial markets, services and retail sales. Travel bans would return, dampening the tourism recovery. The vaccination drive would reset if vaccine producers have to start from scratch, and the global economy would go back into recession.

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6. Interstate cyberwar cripples state infrastructure in major economies

EIU assessment: Moderate probability; very high impact

Russia’s invasion of Ukraine and tensions surrounding Taiwan have increased the likelihood of major state-on-state cyberattacks. Given the much higher costs of direct military conflict and the difficulty in identifying perpetrators of cyberattacks, any military escalation is most likely initially to take the form of cyber-warfare. This could be triggered by a diplomatic breakdown, leading to an escalating string of tit-for-tat cyberattacks, ultimately targeting software that controls state infrastructure. The shutdown of a national grid, for example, would severely disrupt business operations.

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7. Further deterioration in ties between the West and China forces full decoupling of global economy

EIU assessment: Moderate probability; high impact

Western democracies — notably the U.S. and the EU — are concerned about China’s support of Russia following the invasion of Ukraine. In parallel, China worries about U.S.-Taiwan relations and efforts by the U.S. to convince other democracies to pressure it using restrictions on trade, technology and finance. The EU has also taken an increasingly confrontational stance toward China’s human rights abuses in Xinjiang; unequal treatment of EU and Chinese firms; and its subsidy-led industrial model.

In an extreme scenario, China could initiate military maneuvers in the South China Sea, most likely in Taiwan, exacerbating tensions and pushing the West to unite in imposing sweeping trade and investment restrictions on China. This would force some markets and companies to choose sides. For its part, China could block exports of raw materials and goods that are crucial to Western economies, such as rare-earth metals, which would have disastrous economic consequences and force companies to navigate two supply chains while fearing operational disruptions.

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8. Aggressive monetary tightening leads to global recession

EIU assessment: Moderate probability; moderate impact

Major central banks are rapidly raising interest rates to try to tame rising inflation around the world — EIU estimates that global inflation will stand at nearly 10% this year. These measures are fueling a sharp increase in long-term interest rates, raising borrowing costs. A prolonged rise in inflation could prompt central banks to maintain aggressive policies that would undermine household purchasing power amid high energy and commodities prices.

Amid the other destabilizing factors mentioned, this situation could trigger a global recession. In developed countries, the economic slowdown could deepen, resulting in an asset market crash that would weigh on global growth. In emerging markets, interest-rate rises could prompt extreme currency depreciations and raise the risk of sovereign debt defaults, as happened in Sri Lanka in April.

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9. China’s zero-COVID policy creates economic ripple effects

EIU assessment: Low probability; high impact

EIU expects Beijing’s zero-COVID policy to persist until mid-2023. With another coronavirus variant likely to emerge this winter, strict lockdown measures in China remain probable. These, combined with the persistent weakness in the country’s property sector, energy sector woes and a recent drought, could cause China’s economy to contract severely. This would weigh on global economic activity, deteriorating already weak investor sentiment and dampening the performance of global financial markets.

International companies could diversify their operations to non-China-based manufacturing and logistics hubs that have pivoted toward “living with the virus.” However, this would be costly and would need to be carefully framed. Chinese authorities could retaliate, including via enhanced inspections of, or reputational attacks on, those firms that would be considered as “quitting the Chinese market.”

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10. Russia-Ukraine conflict turns into a global war

EIU assessment: Very low probability; very high impact

The war in Ukraine could become a global conflict, pitting Russia against NATO members. The war carries particular risks for NATO member states that border Ukraine and Russia, which could be inadvertently drawn into the conflict. Russia has readied its nuclear deterrence forces and could target critical infrastructure. In case of retaliation from NATO countries, the risk of a miscalculation cannot be discounted.

Prospective and existing NATO member states such as Poland, Romania, the Baltic states, Finland and Sweden are the most likely trigger points. Moldova is another potential flashpoint.

The consequences of a global conflict would be devastating. The global economy would fall into deep recession, with severe human consequences and large-scale fatalities. Such a confrontation could assume a nuclear form, with catastrophic consequences for major cities in Russia, the U.S. and Europe.

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