The Top 10 Global Risks for 2023

Published on February 8, 2023 at 8:20 am by Ty Haqqi in Lists, Macroeconomic Predictions, News

In this article, we will be taking a look at the top 10 global risks for 2023. To skip our detailed analysis, you can go directly to see the top 5 global risks for 2023.

You would think that with all the advancements mankind has made over the last few decades, and continues to make at an astonishing pace, that the world would be experiencing a high level of stability, and an increase in standard of living. While the latter is undoubtedly true, even in developing nations, stability is something that has evaded the globe in recent years, and perhaps it has never been as uncertain as right now.

Whenever a global event occurs, it always affects the financial markets, either in a positive or negative manner. After all, markets are nothing but an indicator about investor’s belief in the future. Hence, the strength of weakness of the financial market can indicate what lies ahead. One of the best examples of this is the Covid-19 pandemic and its impact on the global stock market. When the Covid-19 virus was declared to be a pandemic by the World Health Organization, stock markets in most countries were in absolute freefall. Large and rapid declines followed all sectors especially in sectors which were directly linked to industries devastated by global lockdowns such as the aerospace and defense, and hospitality industries. However, when governments started to respond with record stimulus packages, many sectors, including the pharmaceutical sector, were able to regain their losses while other industries where recovery seemed more uncertain were still well below pre-pandemic levels including travel, oil, insurance and banking.

Anton Balazh/Shutterstock.com

When vaccines arrived and started to take on the vaccine, the situation across the world improved rapidly and market started to recover. Even as more and more variants started to dominate, vaccines were able to emerge victorious, and the threat of a continuing pandemic started to dissipate in early 2022, heralding hopes of a 2022 which would see a high level of growth and stability across most regions. It is a massive achievement that less than 3 years after the pandemic began, it is no longer among the 10 biggest threats for 2023.

Then, in 2022, Russia attacked Ukraine. Separately, economic growth started to slow down and inflation spiraled out of control in most nations at a level that had not been seen in decades. This was in stark contrast to the preceding several years where interest rates remained low and investors were used to stability as opposed to volatility. Even though financial hardships were almost non-existent in these years, financial vulnerabilities were quite high.

In 2022, global financial conditions tightened considerably in a response to rising inflation and consequently, rising interest rates. In many emerging and frontier markets which had weaker macroeconomic fundamentals, net capital outflows were witnessed, not helped by a strongly appreciating dollar. The uncertainty of a possible recession did not help things, and combined with all other issues, saw the U.S. stock markets face their worst first half in over half a century.

While it seems that inflation has peaked in many countries, it rages uncontrolled in others. The Federal Reserve in the U.S. has continued to hike interest rates though they are likely to be in quarter-percentage-point increments as inflation in the country seems to have peaked. On the other hand, there is some good news; recent news has indicated that most of Europe is likely to avoid a recession in 2023, even as a recession seemed all but certain. It is less good news for the United Kingdom, which is still likely to face a lengthy recession, even if its expected duration also seems to have been reduced. In January 2023, the Managing Director of the International Monetary Fund stated that while growth in the U.S. is likely to slow down, a soft landing is possible and could narrowly avoid falling into a recession, which would be fantastic news considering how a recession has seemed imminent for a while now. While unemployment is expected to rise in a weakened labor market, a major national unemployment scare is unlikely as well.

While there is immediate good news, the future of the world primarily depends on how it deals with the biggest global threats in 2023. Before dealing with such threats, it is important to ascertain what these risks are. There are plenty of reputable organization which have conducted their own analysis of this, such as the World Economic Forum’s report on the biggest risks in 2023, Global Risks Report 2023 by Marsh McLennan and a top risks report by Eurasia Group. We then combined similar topics while discounting minor risks such as cybercrime which account for less than 0.1% of the total global GDP. So, without further ado, let’s take a look at the biggest risks likely to drive market sentiment in 2023, starting with:

10. Inflation

2022 was supposed to be year of growth, after the Covid-19 pandemic seemed to finally subside, only for record levels of inflation impacting the cost of living worldwide. Even though it seems that most countries have passed their inflation peak, including the U.S., inflation is still likely to drive a recession in various countries across the world, despite Europe seeming likely to avoid a recession. While aggressive interest rate hikes have helped bring down inflation, in several emerging markets, it still continues unabated and could be a major issue for 2023 as well.

9. European energy crisis

After the Russia-Ukraine war began, the European energy crisis was triggered when Russian energy supplies to Europe were blocked on the pretext of not paying in roubles. This resulted in significantly higher gas prices in Europe, and especially in the United Kingdom, where people had to choose between heating and food as a result of rising prices. These prices allowed both Shell plc (NYSE:SHEL) and BP p.l.c. (NYSE:BP) to post their highest ever profits in their history, even as European countries imposed a windfall tax on the abnormal profits that these companies have recorded because of higher energy prices. However, in early 2023, it does seem that the crisis is slightly behind us, as European energy prices dropped from their 2022 peaks.

8. China

Even when all other countries had reduced pandemic restrictions, China maintained its harsh zero-Covid policy in 2022, which had huge ramifications on its economy. Then, towards the end of the year, China decided to reverse its policy completely, reopening at a rapid pace which is likely to fuel accelerated growth. This will most probably result in higher spending due to pent-up demand, which could possibly result in higher inflation, at a time when most countries seem to have passed their peak in this respect. Higher inflation because of China’s opening will likely result in the below risk of central banks overtightening being realized, which will cause a dip in markets, which is why it is one of the top global risks in 2023. On the other hand, China’s reopening is likely to directly benefit many major companies which have suffered because of the zero-Covid policy including Alibaba Group Holding Limited (NYSE:BABA) and JD.com, Inc. (NYSE:JD).

7. Central banks overtighten

2022 saw global financial markets being devastated as a result of inflation, which in turn led to central banks hiking interest rates. As inflation seems to have peaked in many nations, though others are still at risk of further inflation, most major markets seem to have priced in the expectation that central banks are no longer going to be hiking interest rates further. In fact, most of the jumps in the stock markets have come after interest rate hikes were less than expected. Most central banks have indicated that interest rate hikes are still to continue, with the Federal Reserve indicating that interest rate increases would continue at quarter-percentage-points basis.

6. Debt Crises

It’s more of an issue for emerging markets but debt crises is truly one of the top global risks in 2023, impacting many countries worldwide. Most emerging, developing economies have loans in foreign currencies and the appreciation of the US Dollar has seen this debt burden increase for many nations. Rising fuel prices alone have led to over 90 countries worldwide facing massive protests from the public, while food instability is rising as well in Tunisia, Egypt, Lebanon and Pakistan. Sri Lanka defaulted on its foreign debt in 2022 and is still dealing with the fallout. Meanwhile, Pakistan is at the precipice as well, and the coming months will indicate whether it will be able to avoid defaulting.

Click to continue reading and see the Top 5 Global Risks for 2023.