Economist Intelligence Unit (EIU): Five Global Risks
This year, global business operations are exposed to five potentially disruptive geopolitical and economic risk scenarios, including a green technology subsidy race, extreme weather events and tensions between China and Taiwan.
The main risks are represented by the following scenarios.
- Very high probability = greater than 40% probability that the scenario will occur over the next
two years; high = 31-40%; moderate = 21-30%; low = 11-20%; very low = 0-10%. - Very high impact = change to global annual GDP compared with the baseline forecast of 2%
or more (increase in GDP for positive scenarios, decrease for negative scenarios); high =
1-1.9%; moderate = 0.5-0.9%; low = 0.2-0.5%; very low = 0-0.1%.
The return of Donald Trump to the US presidency disrupts global trade and security alliances
Very high probability; Very high impact
If Donald Trump, the likely candidate for the Republican Party in the presidential election this November, wins a second term, an abrupt and drastic shift in US policies on foreign affairs, trade, energy, immigration, climate change and foreign aid can be expected. Once in office, Mr Trump would likely follow through with his threat of imposing a blanket 10% import tariff. Although some exemptions would be likely, the threat alone would raise tensions and trade costs. His administration could also obstruct the renewal negotiations for the US-Mexico-Canada Agreement (USMCA), risking a deterioration of the US’s close trade ties with its neighboring countries. We also expect him to announce new trade and investment restrictions on China, which will exacerbate disruptions to the global trade system and push up industrial and consumer products costs in the US. On foreign and security policies, the Trump administration would pressure Congress to abruptly reduce or withdraw financial and military support for Ukraine, forcing the latter to agree with Russia on a ceasefire on unfavorable terms. Although we do not expect the US to withdraw from NATO, tensions with other NATO member states will rise and efforts to increase and enhance Europe’s own military capacities will grow. A US government under Mr Trump will not pressure Israel to limit its military operation in Gaza, to constrain its illegal settlements in the West Bank or to commit to a two-state solution to the Israel-Palestine conflict, stoking a wider conflict in the Middle East. It will exit the Indo-Pacific Economic Framework for Prosperity, a multilateral economic cooperation framework launched by the Biden administration, further reducing US economic influence in the region. All this would stoke tensions with US allies—notably the EU, the UK, Australia and Japan—and complicate other foreign relations. A general rise in volatility in US foreign policy could erode confidence in the country’s ability to set long-term policies, and therefore its reliability as a partner. In parallel, China would probably try to benefit from tensions by seeking to dissuade US partners from following US policies towards China.
A green technology subsidy race becomes a global trade war
Moderate probability; High impact
Western economies are rolling out generous incentives for businesses to invest in clean energy technologies to achieve net-zero greenhouse gas emissions and enable greater competition with China, which is the global leader in green technology production. Most incentives include strict sourcing requirements for components (notably in the US). These requirements have already spurred tensions between the EU and the US, and will probably raise the cost of green technologies. If Western relations with China sour substantially, Western economies could increase existing tariffs on Chinese imports or accelerate decisions on pending investigations into anti-dumping and state subsidy charges, further fueling price growth. China would retaliate, possibly by blocking exports of raw materials that are critical to the green transition agenda such as rare earths, making decarbonization efforts more expensive for developed markets. These costs would force economies to consider returning to carbon-based technologies and limit support from Western countries to fund emerging markets’ energy transition.
Extreme weather events caused by climate change disrupt global supply chains
Moderate probability; High impact
Climate change models point to increased frequency of extreme weather events. So far these have been sporadic and in different parts of the world, but they could start to happen in a more synchronized manner. Severe droughts and heatwaves have already weighed on crop yields, and the emergence of a strong El Niño could exacerbate weather events and push global temperatures above the records reached in 2023. If extreme weather events have a significant impact on production, this could lead to shortages, straining global supply chains and once again adding to upward inflationary pressures. Higher costs would probably spill over to households, exacerbating concerns about the cost of living and food security. Food shortages in some parts of the world could lead to mass migration, or even war, triggering severe political impacts that could ripple across multiple countries. Countries in Africa’s Sahel region are particularly vulnerable to food and water shortages, as a wave of coups has severely weakened state capacity to deliver necessities to the population, and political instability and a reduced presence of UN peacekeeping forces have raised the risk of conflict in the region. Bangladesh, one of the world’s most densely populated countries, is highly exposed to climate change-related weather disasters, which could cause mass population displacement, industrial disruptions, food and shelter shortages and the spread of infectious diseases.
China moves to annex Taiwan, forcing a sudden global decoupling
Low probability; Very high impact
A direct conflict between China and Taiwan is unlikely in 2024-25, owing to the risks to all those involved. Nonetheless, there will be periods of heightened tension, and the inauguration in May of Taiwan’s president-elect, Lai Ching-te, who has made statements in the past on promoting Taiwan’s formal independence, may serve as a spark. Regardless of its trigger, a military conflict would weigh heavily on Taiwan’s economy and severely disrupt global industry given the reliance on the island’s cutting-edge semiconductor sector and its position in regional shipping routes. A cross-Strait war would probably result in the US military becoming involved in the defense of Taiwan, with differing forms of support also coming from US regional allies such as Australia, South Korea and Japan, and prompt the EU and other US-aligned governments to impose trade and investment restrictions on China. Nuclear escalation would be a risk. Third markets (and companies) elsewhere could be forced to “choose” between China and Western economies. In retaliation, China could block exports of raw materials and goods that are crucial to Western economies, like rare earths and graphite.
The Israel-Hamas war escalates into a regional conflict
Moderate probability; High impact
If Israel’s war with Hamas expands into a full-scale military operation in the West Bank, or a prolonged occupation of Gaza by Israeli forces causes an uprising among Palestinians, other state and non-state actors may become involved in sympathy with the Palestinian cause. We assess the likelihood of Iran getting directly involved in the war as slim, but the country could use its heavy influence on proxies such as Hezbollah in Lebanon to prolong and expand the scale of the conflict. Evidence of Iranian involvement would lead to countermeasures from Israel, turning the conflict into a regional one and widening its economic and geopolitical impact. There are also risks associated with disruptions to the region’s maritime shipping routes and global terrorist activities perpetrated by non-state actors. In an already tight oil market, disruption to oil production and shipping from the Middle East would increase international oil prices significantly, further prolonging cost-of-living pressures, particularly for oil-importing emerging economies. A regional conflict in the Middle East would also draw in external powers, potentially exacerbating tensions between the US and its allies on the one hand, and China and Russia on the other.
Ed. Events may diverge from EIU’s forecast in ways that affect global business operations.
