Top 10 global risks in 2023

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1. Deep global recession

The biggest risk facing Canadian exporters largely stems from the soft global economy, as it continues to recover from the COVID-19 pandemic. The dramatic increase in central bank policy rates over the past year-and-a-half, together with associated financial market stresses, will reduce the flow of credit into the system over the next several quarters. It could even bring about a deep global recession, especially if lenders tighten lending standards further in response. According to our calculations, this could lead to a permanent loss of 1% and 2% of global economic output. EDC Economics assesses the likelihood of such a scenario at 30%, making it no longer a tail risk.

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2. Wave of corporate defaults

At the onset of the pandemic, governments around the world provided ample stimulus and relief measures on top of monetary stimulus, which shielded businesses from liquidity and solvency issues. But as inflationary pressures resurfaced and gathered steam, central banks globally have been forced to embark on one of the fastest tightening cycles in history. A combination of higher borrowing costs and slowing global growth has meant that the first quarter of 2023 saw the highest number of corporate defaults since late 2020. As the global economy transitions from an environment of lax to expensive credit, a key risk to watch for is a wave of corporate defaults across various industries and jurisdictions.

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3. United States financial crisis

With the hefty increases in U.S. interest rates in the last year-and-a-half, the tension in the U.S. financial systems has also been increasing, like the pressure along a fault line. Viewed through this lens, the failure of Silicon Valley Bank and others since March 2023 would represent minor tremors, while a major banking sector crisis represents a full-scale earthquake.
In this risk event, the U.S. financial system buckles from interest rate increases and unleashes economic uncertainty globally. With nearly 4,700 banks in the U.S.—most of them small and mid-sized—a large part of the banking system is at risk of deposit flight or underwater balance sheets as asset values have lagged interest rate increases. Higher rates and a weaker outlook could push borrowers to default and begin collapsing banks—and the global economy.

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4. Sovereign debt crisis

EDC Economics’ base case analysis continues to be that the risk of a systemic sovereign debt crisis remains low. Nevertheless, the ingredients for a dangerous cocktail is coming together; mix in public debt above pre-pandemic levels, slowing global growth and rising government spending, and you get a greater likelihood of sovereign defaults. A recent study by the International Monetary Fund (IMF) estimates that over the next seven to 10 years, debt vulnerabilities among low-income countries could approach crisis levels last seen in the mid-1990s. A deep global recession, another commodity price shock, or a U.S. financial crisis would accelerate the timeline. A wave of sovereign defaults, particularly in mid to large emerging markets such as Egypt or Nigeria, would impact Canadian companies doing business there.

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5. Unwinding of globalization

While some risks are more cyclical in nature, others may be part of more broad-based secular trends. One of these is concern around the unwinding of globalization. While our base case doesn’t envision a material upending of the global trade paradigm, the risk of geopolitical fragmentation should be considered. Specifically, the increasingly antagonistic posture of the world’s major trading blocs has already instigated reciprocal retaliations around critical industrial technologies. If the global economy fragmented into distinct blocs across the board, it would have major impacts for Canadian exporters whose businesses are highly integrated with other countries. Such a scenario would also mean a hit to global growth as supply chains become redundant.

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6. Supply chain and labour constraints

Changes in supply chains will remain an important concern in the coming years. Manufacturers around the world, especially in the West, are adjusting to a new post-COVID-19 world rife with sanctions, trade wars, inflation, high interest rates, port strikes and a prolonged conflict in Ukraine. All these factors combined will impact supply chains from grain to semiconductors. Increasingly, manufacturers must decide how to diversify their supply chains to avoid over-dependence on a single country to serve their top markets. While supply chain pressures have eased over the past year, labour constraints remain an ongoing concern for Canadian exporters.

7. Escalation of Russia-Ukraine conflict

EDC Economics base case analysis is that fighting will continue along its current trajectory. While it’s unclear what might trigger an escalation in the conflict as many “red lines” have already been crossed, the threat of war spreading beyond Ukraine’s border and engaging the National Atlantic Treaty Organization (NATO) directly can’t be ruled out. Europe has been significantly increasing its defence spending with this risk in mind. While Canadian companies have largely adjusted to the impacts of the conflict, if it escalates, it will likely dampen regional trade and growth, disrupt food and energy exports, as well as cause a rethink of supply chains for those affected.

8. Canada-China trade and investment curtails

In the event of a deterioration of bilateral relations between Canada and China, there’s a significant risk of negative spillover into primarily trade and potentially investment between the two countries. This would mostly likely be in the form Chinese retaliatory actions—administrative or procedural—against key Canadian commodity exports to China such as pork or canola. If bilateral relations severely deteriorate, there could also be impacts such as targeted export controls by China that could negatively impact Canadian exports.

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9. Energy crunch

In 2022, we saw high energy prices and their inflationary effects increase economic uncertainty and social unrest across the globe. Developing countries dependent on energy imports were hit the hardest. As global economic growth decelerates, energy prices have been on a downward trend, but the global energy crunch has yet to reach its end. Declining foreign exchange reserves and weakened currencies have put pressure on the ability of some emerging markets to pay for imports. As a major oil producer and net energy exporter, Canada is expected to help relieve the global energy crunch by delivering more Canadian crude to the world—with the Trans Mountain Pipeline Expansion project to be fully operational in early 2024, Canada’s crude export capacity is estimated to expand by about 15%.

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10. Global food insecurity

While global food prices have fallen since the peak of 2022, they remain above pre-pandemic levels. Domestic food price inflation is high across the world. As the number of people facing acute food insecurity continues to rise, the United Nations and the World Bank fear that the sustainable development goals of zero hunger by 2030 is going to be very difficult to achieve. Given both countries are major producers of key agricultural commodities such as wheat, the ongoing Russia-Ukraine war keeps food security risk at an elevated level. Other factors such as extreme weather conditions induced by climate change continue to expose the delicately balanced world food system to uncertainty. Canada’s growing agri-food sector has an opportunity and role to play in mitigating the global food insecurity risk by alleviating supply pressures.

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Top 10 global risks in 2023

Top 10 global risks in 2023

1. Deep global recession

2. Wave of corporate defaults

3. United States financial crisis

4. Sovereign debt crisis

5. Unwinding of globalization

6. Supply chain and labour constraints

7. Escalation of Russia-Ukraine conflict

8. Canada-China trade and investment curtails

9. Energy crunch

10. Global food insecurity

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