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Demand-supply gaps and geoeconomic confrontation top WEF risk report

Major risks facing global trade over the next two years include crises in food and energy supply chains and geoeconomic conflict, according to a report released today by the World Economic Forum (WEF).

The top three current risks to trade are the energy supply crisis, the cost-of-living crisis and rising inflation, the WEF says, while natural disasters and extreme weather events and geoeconomic confrontation are among the most pressing global risks predicted by 2025.

Circulated ahead of the WEF’s meeting in Davos, Switzerland next week and published in partnership with Marsh McLennan and Zurich Insurance Group, the 2023 Global Risks Report asks global risk experts, policy-makers and industry leaders to name the most severe current risks, as well as those likely to have the most impact over a two-year and 10-year period.

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Increasing geoeconomic warfare is a significant risk, the WEF says, as economic policies continue to be used to develop self-sufficiency and stop the rise of other powers.

“Intensive geoeconomic weaponisation will highlight security vulnerabilities posed by trade, financial and technological interdependence” between global economies, potentially leading to “an escalating cycle of distrust and decoupling” as well as “inefficient production” long term, it says.

Speaking at a press conference for the report launch, Carolina Klint, risk management leader for continental Europe at Marsh, said that securing access to raw materials and making supply chains more robust would be a priority.

“Businesses need to keep an eye on these political risk scenarios, as well as the increased geopolitical tension in the world, because it creates complexity in terms of managing risks in supply chains,” she said.

In the wake of trade restrictions triggered by the war in Ukraine, Klint said that companies are now “turning from a just-in-time approach to a just-in-case strategy”, which includes tactics like nearshoring, stockpiling and vertical integration.

“The relative predictability of the business environment has gone down, which is really forcing companies to allow more slack in the system and be willing to invest a little bit more upfront in order to stay in business and build the needed resilience,” she said.

The report emphasises a demand-supply gap for natural resources like food, water, energy and critical minerals and metals in particular. According to the WEF, annual demand for resources such as lithium and cobalt is expected “to hit 450% of 2018 production levels by 2050”.

The collapse of systemically important supply chains was also viewed as having a ‘high’ risk influence in terms of its effects on other factors, placing it on a par with state collapse and the erosion of social cohesion.

Saadia Zahidi, WEF managing director, said at the report launch that “a renewed focus on trade investment and cross-border investment” was needed to reduce the risk of economic warfare in the coming years.

While less prominent among the short-term threats, the failure to mitigate climate change and its related risks, such as ecosystem collapse and large-scale involuntary migration, dominate the long-term risks.

John Scott, head of sustainability risk at Zurich Insurance Group, told attendees at the report launch that not enough was currently being done to combat climate change.

“We’re living in a world right now where what is scientifically necessary, and what is politically expedient don’t match,” he said, noting that “we’re heading towards a much slower and more disorderly climate transition in reality”. Scott added that he was optimistic overall about adaptation to the climate crisis, following progress made on loss and damage agreements.

Last year’s report, released before Russia’s invasion of Ukraine, highlighted commodity price shocks, inflation and energy transition challenges as posing the most pressing risks to trade.

Klint drew attention to the need to “ask the people who actually know something about the risk”, given the fact that in 2022 geopolitical confrontation did not appear in the aggregate list of top 10 risks for the next two years, yet on a country-by-country basis, interstate conflict featured in the top three risks for Russia, Ukraine, Estonia, Georgia, Lithuania, Latvia and Poland.

The WEF report follows the World Bank’s latest Global Economic Prospects release, which forecasts a similarly gloomy outlook for 2023. It expects the global economy to grow by just 1.7% in 2023 and 2.7% in 2024, while growth in advanced economies is projected to slow from 2.5% in 2022 to 0.5% in 2023.

It also points to low investment, particularly in emerging market economies. “Subdued investment is a serious concern because it is associated with weak productivity and trade and dampens overall economic prospects,” says Ayhan Kose, director of the World Bank’s prospects group. “Without strong and sustained investment growth, it is simply impossible to make meaningful progress in achieving broader development and climate-related goals.”

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