On October 19, 2023, the Economist Intelligence Unit (EIU) published a report titled “Risk Outlook 2024,” which reviewed several traditional and non-traditional risks likely to impact the global economy in the coming year.
Traditional Challenges
The report addresses a number of traditional risks expected to confront the global economy next year, varying in their likelihood and impact:
Continued Tightening of Monetary Policies and the Likelihood of a Global Recession:
Since early 2022, major central banks have pursued tight monetary policies to control rising inflation rates by increasing interest rates and reducing their balance sheets. Although inflation rates have shown a downward trend, there is a “moderate” likelihood that inflation might accelerate again in 2024, driven by strong global demand and rising prices of key commodities due to supply shortages. This could prompt central banks to continue tightening monetary policy and raise interest rates to levels likely to significantly reduce consumer and investment demand. In emerging markets, high interest rates could lead to a sharp decline in currency values, increasing inflation rates and putting pressure on economic growth. Conversely, in major developed countries, reducing central bank balance sheets could result in sharp sell-offs in the sovereign bond market and rising risk premiums in 2024, especially in heavily indebted European economies, potentially leading to a global recession.
Setbacks in Advanced Economies’ Efforts to Support Green Transition:
This scenario has a moderate likelihood but a high impact. While Western economies offer generous incentives for companies to invest in clean energy technology to enhance local industrial capacity and competitiveness against China, most of these incentives have strict input source requirements, particularly in the US. These requirements have already caused tensions between the EU and the US and are likely to increase input costs, subsequently raising the prices of green technologies. If Western relations with China sharply decline, Western economies might increase tariffs on Chinese imports or accelerate anti-dumping measures, leading to price growth. In response, China could impose retaliatory policies, possibly banning the export of crucial raw materials for the green transition agenda, making decarbonization efforts more costly for advanced economies. This could lead them to reconsider relying on carbon-based technologies and limit funding support for energy transition in emerging markets, delaying timelines for achieving net-zero emissions.
Emergence of Protests, Industrial Strikes, and Declining Productivity:
This scenario is highly likely but has a moderate impact. Rising global commodity prices, continued supply chain disruptions, and declining national currencies against the US dollar in some countries could fuel public discontent during 2024-2025 due to the gap between wage increases and accelerating inflation in most countries, limiting poor households’ purchasing power, including their ability to buy essential goods. This could lead to social unrest, expanding small protests and industrial strikes. In a more extreme scenario, labor protests in major economies could evolve into widespread strikes demanding wage increases in line with inflation, potentially paralyzing entire industries or public services for an extended period. Protests and strikes might spread to other sectors or countries, affecting global growth overall.
Eroding Confidence in US Long-Term Policies: This scenario has a moderate likelihood and impact. While President Joe Biden’s Democratic administration supports US presence in multilateral international institutions and actively engages with key security and economic partners globally, the 2024 US presidential election could result in a Republican-led administration, potentially causing abrupt shifts in US foreign policy on these international positions. A new administration could disrupt global efforts to reduce greenhouse gas emissions, withdraw Washington from long-standing alliances, and abruptly reduce financial and military support for Ukraine, strengthening Russia’s position in the war and unsettling some US allies like the EU, UK, Australia, and Japan. Increased volatility in US foreign policy-making could erode confidence in the country’s ability to implement long-term policies. Simultaneously, China might seek to exploit the situation by persuading Washington’s partners to avoid adopting the US’s tough stance toward China.
China Abandoning Market Economy and Adopting State Economy:
China’s delayed response to the COVID-19 outbreak in 2019 and subsequent post-pandemic slowdown have undermined confidence in the government’s ability to direct the market economy. If Beijing faces an economic recession, the government might resort to significant stimulus policies rather than limited measures to stabilize the economy and markets. Expansionary measures could include monetary easing, bailing out real estate developers, or easing housing purchase restrictions in first-tier cities. Public criticism arising from this approach might push the ruling Chinese Communist Party to limit support for the market economy, shifting towards a centrally planned economy. This could involve reimposing strict controls on commodity prices or nationalizing the housing sector after renewed efforts to reduce debt. Consequently, economic productivity and growth potential in China might diminish, limiting global economic prospects.
Exceptional Obstacles
The report outlines several non-traditional risks expected to face the global economy by 2024, varying in likelihood:
Climate Change Disrupting and Straining Global Supply Chains:
Climate change models indicate an expected increase in the frequency of extreme weather events. Although the likelihood of this scenario is increasing, its impact would be moderate. While such events have so far occurred non-synchronously in different parts of the world, they are likely to start happening more rapidly and simultaneously, negatively affecting production lines for some industries and products like agricultural crops, leading to severe shortages and straining global supply chains. Severe droughts and heatwaves have already harmed crop yields, and geopolitical factors like the collapse of the grain export deal between Russia and Ukraine could impose operational pressures on industries dependent on basic commodities.
Semiconductor Industry Cut Off from Global Supply Chain:
Although the likelihood of this scenario is low, its impact would be significant if it occurs. The essence is the possibility of a direct conflict between China and Taiwan in 2024, given the increasing tensions among all parties directly involved in the conflict. Increased Chinese military exercises near Taiwan might heighten the risk of miscalculation, potentially escalating into a broader conflict. Additionally, a formal declaration of Taiwan’s independence could hasten a Chinese attack. Regardless of the reasons contributing to its escalation, such a large-scale conflict, possibly involving military participation from the US’s regional partners like Australia, South Korea, and Japan, could significantly impact Taiwan’s economy, potentially causing a “temporary” break in the semiconductor industry’s global supply chain. Additionally, the broader global repercussions of the war could prompt the EU and other governments allied with Washington to impose trade and investment restrictions on China. In response, Beijing might impose retaliatory measures, forcing third-party markets and companies worldwide to choose between China and Western economies.
Artificial Intelligence Technologies Undermining Trust in Global Systems:
Companies and global governments have rapidly begun testing and integrating AI technologies to enhance human capabilities rather than replace them, offering companies the opportunity to improve productivity. However, the increasing reliance on AI on a large scale will heighten the risk of misinformation campaigns and fuel existing doubts among some citizens towards governments in the coming years. AI is likely to influence the outcome of major elections scheduled worldwide in 2024, especially in the US, UK, India, Taiwan, and the European Parliament elections, undermining voters’ trust in global political systems on a broader scale.
Extended Impacts of the Ongoing Conflict Between Israel and Hamas:
Although this scenario is less likely, it could have a significant impact. If the military conflict between Israel and Hamas escalates and Israel occupies Gaza, regional actors like Iran and its proxies in the region – although this is a slim possibility – might engage in the conflict, using their influence to prolong and expand its scope. If Israel confirms Iran’s involvement, it might take countermeasures, potentially turning the conflict into a broader regional one with far-reaching economic and geopolitical impacts. In an already tight oil market, disrupting oil production and shipping from the Middle East would have a significant upward impact on global oil prices, increasing living cost pressures, especially for emerging oil-importing economies. A regional conflict in the Middle East could escalate with the involvement of external international powers, such as the potential role of the US and its allies on one side, possibly countered by China and Russia on the other.
Ukrainian-Russian War Expanding into a Broader Global Confrontation:
Although this scenario is unlikely, it could have a significant impact if it occurs. Increasing tensions in relations between Western countries and Russia have raised various military risks, including cyber-attacks on critical infrastructure. With growing risks of miscalculation on NATO’s borders with Russia and Western allies forming a united front against Moscow, Russia might convince its allied countries, particularly China and Iran, to join the confrontation. Such a conflict would undoubtedly be devastating globally, potentially leading to a deep global economic recession, with severe humanitarian consequences and widespread fatalities. The risks could worsen if the conflict takes on a nuclear dimension, with catastrophic consequences.
Source:
Risk Outlook 2024, The Economist Intelligence Unit (EIU), October 19, 2023
