Agricultural commodities

Global operational risk review—are there upside risks?

  • Since Russia invaded Ukraine in February we have revised down the operational risk score for 106 countries (out of 180).
  • We expect that economic and political risks associated with the war will endure in 2023 and beyond. 
  • As the war in Ukraine rages on, threats to the safety and operations of critical infrastructure have risen (notably in Europe).
  • China is increasingly sceptical of US-Taiwan relations. Chinese military exercises raise the risk of a miscalculation, which could spiral into a wider conflict.
  • The threat of a new wave of coronavirus infections also continues to loom over the global economy, with concerns about undervaccinated countries.
  • Despite these downside risks, there are some upside scenarios, including a mild winter that reduces Europe’s energy demand, and a rapid fall in global inflation due to  commodity prices that are lower than our current forecast.

In the third quarter of 2022 we downgraded the overall operational risk score for 69 out of 180 countries (compared with 71 last quarter). Macroeconomic risks were the main reason for these revisions for the second quarter; the macroeconomic risk score decreased for 65 countries (compared with 87), reflecting rising interest rates and exchange-rate volatility. Russia’s invasion of Ukraine, global monetary tightening and an economic slowdown in China are weighing on the global economy; we expect global GDP to grow by 1.6% in 2023 (compared with 2.8% in 2022).

This chart shows a world map that highlights the countries that had the increasing in decreasing risk between July and September 2022. Those countries with the greatest increase in risk include Norway, Czech Republic, Slovenia, Hungary, Azerbaijan, China, Sri Lanka and Madagascar. The only country with a large decrease in risk was Mali, but this improvement was due to that country lifting ECOWAS sanctions.

Critical infrastructure is exposed to cyber-attacks

Russia’s invasion of Ukraine and tensions surrounding Taiwan have increased the likelihood of a major attack on critical infrastructure such as gas pipelines, telecommunication cables or a national electrical grid. Given the the difficulty in identifying perpetrators of cyber-attacks and the high cost of a direct military response, any retaliation is most likely, at least initially, to be in the form of cyber-warfare, which would ultimately target state infrastructure such as power plants or electrical networks. Such an attack would severely disrupt the business operations of companies located in particularly susceptible countries like Taiwan, the US and EU member states.

US-China tensions over Taiwan are rising

A direct conflict between China and Taiwan is unlikely, but tensions grew when China conducted “targeted military operations” following a visit to Taiwan by the speaker of the House of Representatives (the lower house of the US Congress), Nancy Pelosi, in August. China’s countermeasures have included live-fire military exercises in and around Taiwan’s territorial waters. The US government has reiterated that its diplomatic approach towards Taiwan has not changed, but China is increasingly sceptical of US-Taiwan relations, particularly given the acute hostility towards China in the US Congress. The risk of a full military invasion is mitigated by China’s reliance on Taiwan’s semiconductors and concerns about the US’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. Such a conflict would wipe out Taiwan’s economy, including its semiconductor industry, on which global supply chains rely. It would also risk drawing in the US, Australia and Japan, starting a catastrophic global conflict.

A new coronavirus variant could send the global economy back into recession

Amid global vaccine inequity, the relaxation of government policies and pandemic fatigue, we expect a new variant of covid-19 to emerge in late 2022 or early 2023. If it escapes immunity (despite a reformulation of vaccines), this could cause a repeat of 2020. Risks are not only related to the coronavirus—experts are warning that other infectious diseases will soon emerge (such as monkeypox). The increasing number of high-security laboratories around the world, including in countries that are not known for their stringent safety procedures, poses another risk. If another aggressive variant of the coronavirus materialises, 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 had to start from scratch, and the global economy would go back into recession. 

One-fifth of the world's population live in a country with a high or very high operational risk level. This chart is a global map that colour-codes every country's EIU operational risk score.

Upside scenarios could improve our forecasts

Despite the many downside risks, there also exist upside risks that could have a positive impact on our forecasts. Unseasonable weather conditions (with high temperatures in parts of Europe) illustrate the negative effects of climate change. However, in the short term, these could limit the repercussions of the war in Ukraine. If Europe experiences an abnormally warm winter, this would reduce the region’s energy demand, and plentiful global rainfall could allow for a bumper crop from major agricultural producers (low probability). These conditions would probably cause commodity prices to fall faster than our current forecast and bring down global consumer price inflation (21-30% probability). We have mapped out the potential effect of other upside risk scenarios in the below table.

This chart shows five upside risk scenarios. The first is that China accelerates the easing of " zero-covid" policies with a moderate probability and high impact. The second is that the EU boosts LNG and renewable energy capacity faster than expected, with a low probability and very high impact. The third is that global inflation falls fast, due to low global commodity prices, with moderate probability and moderate impact. The fourth is that mild winter temperatures and plentiful rainfall reduce Europe's energy demand, and lead to a global bumper crop, reducing the risk of food insecurity, with a low probability and high impact. The final scenario is that Russia withdraws from Ukraine, with a very low probability and very high impact.

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