Category Risk Management

Climate, inflation and war dominate global risk landscape

23 January 2023 Gareth Stokes

The economic and political consequences of the Russia-Ukraine war have had a significant impact on the global risk outlook, elevating ‘cost-of-living crises’ to first position on a two-year risk view, and geo-economic confrontation to third. According to the World Economic Forum (WEF) Global Risks Report 2023, produced in partnership with Marsh McLennan and Zurich Insurance Group, “the first years of this decade have heralded a particularly disruptive period in human history”. The report is based on a Global Risk Perception Survey (GRPS), which “brought together leading insights on the evolving global risks landscape from over 1 200 experts across academia, business, government, the international community and civil society”.

Our decade of despair kicked off with the 11 March 2020 confirmation by the World Health Organisation (WHO) that an outbreak of novel coronavirus, COVID-19, was indeed a pandemic. In the two years that followed, countries stuttered through some or other level of pandemic response, varying from full lockdown to domestic and global travel restrictions to the gradual reopening of economies, all the while pushing for vaccination of populations. Businesses, meanwhile, wrestled with supply chain disruptions and work-from-home, to name a few. Then, just as the fog of pandemic started to clear, Russia invaded Ukraine… The war, already into its 11th month, is contributing to food and energy crises across Europe and globally. 

Traditional risks are making a comeback

“We have seen a return of ‘older’ risks [such as] inflation, cost-of-living crises, trade wars, capital outflows from emerging markets, widespread social unrest, geo-economic confrontation and the spectre of nuclear warfare, which few of this generation’s business leaders and public policymakers have experienced,” noted the report. And these older risks are converging with emerging risks “to shape a unique, uncertain and turbulent decade to come”. According to the Global Risk Report,  new and emerging developments in the risk landscape include unsustainable levels of debt, low growth, low global investment and de-globalisation, a decline in human development and, of course, climate change. They report also suggests monitoring the unconstrained development of technologies. 

On a two-year view, the top five global risks are listed as cost-of-living crises; natural disaster and extreme weather events; geo-economic confrontation; failure to mitigate climate change; and the erosion of social cohesion and social polarisation. The landscape changes slightly on a 10-year view, with failure to mitigate climate change; failure of climate change adaptation; natural disasters and extreme weather events; biodiversity loss and ecosystem collapse; and large-scale involuntary migration in the top five. Over the following paragraphs, we expand on three of the short-term risks; those among you who are interested in a comprehensive overview of the global risk landscape will have to get your hands on the WEF Global Risks Report 2023, available as a PDF download online, and pore through its 98-pages at leisure. 

Food, energy and housing prices through the roof

The cost-of-living crisis is plaguing many economies worldwide, and ‘hitting’ the poorest in those economies the hardest. “Even before the COVID-19 pandemic, the price of basic necessities, non-expendable items such as food and housing, were on the rise,” noted the report. “Costs further increased in 2022, primarily due to continued disruptions in the flows of energy and food from Russia and Ukraine”. The report leads with war as the main contributor to the cost-of-living crisis, but it can be argued that global fiscal and monetary policy approaches going back as far as the 2008-9 Global Financial Crisis (GFC) share the blame. Between 2009 and 2021, developed market central banks simply abandoned their inflation targeting mandates in favour of pro economic growth polices, resulting in the now well-documented lower-for-longer interest rate environment. 

Lower-for-longer interest rates plus the record amounts of fiscal stimulus given to US households during pandemic  turned out to be massively inflationary. By mid-2022 the US was experiencing the highest core price inflation in over four decades, leaving the US Federal Reserve no choice but to hike interest rates to cool inflation… As a result, the US Federal Fund Effective Rate screamed higher from around 0.2% in February 2022 to 4.1% by December. Higher interest rates hit households hard, as the report observes: “global mortgage rates have reached their highest level in more than a decade [with] some estimates suggesting that the increase in rates amounts to a 35% increase in mortgage payments for homeowners”. 

Participants in the WEF survey expect the cost-of-living crisis to be short-lived, but there are concerns that “a growing proportion of the most vulnerable parts of society are priced out of access to basic needs, fuelling unrest and political instability”. This warning will resonate with FAnews readers following the looting and rioting that affected parts of Gauteng and KwaZulu-Natal in July 2021, causing insured losses north of ZAR30 billion. South Africa is no stranger to high inflation either, and there are concerns that a combination of inflation; high unemployment and an ongoing electricity crisis could contribute to a repeat of this mayhem. 

The 1.5C global warming cap looks unattainable

Climate change related risks dominate both the two and 10-year risk maps. Failure to mitigate climate change ranked second on a two-year view thanks to 70% of GRPS respondents rating existing measures to prevent or prepare for climate change as ‘ineffective’ or ‘highly ineffective’. “Despite 30 years of global climate advocacy and diplomacy, the international system has struggled to make the required progress on climate change,” noted the report, before adding that it was “very unlikely that global ambitions to limit warming to 1.5C will be achieved” and that a 2.7C rise by mid-Century was more likely. There is widespread buy-in from countries to explore renewable sources for energy; but the Russia-Ukraine war and the need to balance environmental and social concerns, especially in poorer economies, have negatively impacted progress. 

Even as global financial institutions kept up the pressure to halt new fossil fuel projects, the report noted that the “European Union (EU) spent at least EUR50 billion on new and expanded fossil-fuel infrastructure and supplies, and some countries restarted coal power stations”. The irony is tangible… European countries that have brought significant pressure to bear on Africa to abandon coal-fired electricity seem quite content to use dirty fuel when it is in their interest. South Africa’s repeated call for a just energy transition is contextualised in the report with this warning: “the stark reality [is that there are] 600 million people in Africa without access to electricity, [which] illustrates the failure to deliver change to those who need it and the continued attraction of quick fossil-fuel powered solutions…” 

Countries reconsider relationships as China, North Korea and Russia act out

The report distinguishes between geo-economic confrontation (including investment screening, sanctions and trade wars) and interstate conflict, which are expected to remain largely economic in nature over the short-term. Much time was devoted to the sanctions that followed Russia’s invasion of Ukraine, which were broadly described as the “weaponization of economic policy between globally integrated powers”. At first glance this observation seems extreme, but if you pause for a moment to reflect then you realise that the conflict has forced many countries to reconsider their international relations. Voting on Russia-related motions at the United Nations soon revealed three groupings: countries either supported Ukraine and the NATO-aligned bloc, or supported Russia; or abstained, in so doing often confirming their reluctance to align with the West. 

“In the face of vulnerabilities highlighted by the pandemic and the war, economic policy, particularly in advanced economies, is increasingly directed towards geopolitical goals,” noted the report. One observation, repeated in countless global investment outlook presentations, is that firms are looking to move their supply chain dependencies from East to West with the goal being to increase self-sufficiency, even if inflation is a consequence. According to the report, this supply chain ‘shift’ is one of many “defensive measures to boost local production and minimise foreign interference in critical industries”. 

SA-based businesses face unique operational risks

We conclude with a comment from the report’s introduction: “cost-of-living dominates global risks in the next two years while climate action failure dominates the next decade, which will be characterised by environmental and societal crises driven by underlying geopolitical and economic trends”. Either construct is relevant in a domestic context, though South African businesses are far more concerned with the impact that crime, crumbling municipal infrastructure, loadshedding and political skulduggery are having on their operations. 

Writer’s thoughts:
As we scoured the WEF Global Risk Report 2023, we could not help but wonder how many SA-based small, medium and micro-enterprises (SMMEs) would give its findings the time of day. Local firms are too busy battling crumbling municipal infrastructure and 10-hours-per-day power outages to worry about ‘big picture’ global risks… Or have we entirely missed the point? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts

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