Global economy recovery: it remains a marathon

With the war in Ukraine on all our minds, it is easy to lose sight of the fact that the sharpest global recession of our lifetimes hit just two years ago, when COVID-19 gripped the world. The pandemic's economic wounds, which will require years to heal, had reduced prospects for sustainable growth even before the war. The ongoing Russian invasion has compounded an already slowing-growth environment. With so many challenges, structural change is needed to boost resilience.

Last year, the global economy recovered strongly from the pandemic-induced recession in 2020. Vaccine rollouts and unprecedented levels of fiscal stimulus that cushioned the economic blow of lockdowns were powerful demand-driving forces. However, the recovery was cyclical, not structural. The COVID-19 crisis created long-term structural challenges, leaving the global economy with less shock-absorbing capacity than after the global financial crisis in 2008-09.

A main challenge to bolstering resilience will be the legacy of historically high levels of public and private sector debt levels as a result of the massive fiscal stimulus response. Debt overhangs inhibit productivity and sustainable growth. Additionally, with so much spending, fiscal resources have been exhausted, meaning less buffer to manage future crisis situations. The pandemic also exacerbated inequality, with people in low-paying jobs such as in hospitality and retail hit harder than higher-paid people who could work from home. While government support offset some income losses, policy measures also strengthened financial markets, resulting in rising inequality on the wealth side, too. Widening inequality leads to lower productivity growth, rising polarisation and anti-globalisation sentiment, factors that will continue to undermine economic resilience over the long term.

The pandemic also helped create what we expect will be structurally higher inflation over the next decade. A main reason for this will be deglobalization, momentum for which was boosted by COVID-19. Supply chain disruptions and shortages of input goods such as semiconductors or lumber due to backlogs resulting from lockdowns and shipping congestion continue to hamper production in major sectors. The experience has encouraged companies and governments to move production to parallel supply chains and/or "re-shore" operations. The likely result? Less-cost-efficient production with the potential to help fan rising prices and add to underlying inflation pressures.

Without a doubt, the conflict in Ukraine has further darkened the outlook. The negative impact will be felt through five key channels: 1) Higher energy prices and reduced supply, particularly to Europe, will weigh on growth and add to inflation pressures. The supply and price shock will extend to other commodities, as Russia and Ukraine are major exporters of wheat and grains, and also of metals used in semiconductors. 2) tighter financial conditions; 3) weaker investor, business, and consumer sentiment; 4) financial market volatility due to rising uncertainties; and 5) disruptions to trade due to sanctions on Russia and export controls, amplifying existing supply chain disruptions.

At this juncture, the global economy may also be at the cusp of a paradigm shift in interest rates. The high inflation environment, compounded by the spike in commodity prices, is forcing central banks to accelerate interest rate hikes in advanced and several emerging economies. However, it will be difficult for central banks to engineer a 'soft landing' given that the hikes are coming in slow growth environment.  The upshot is that the risk of mid-term stagflation and recession outcomes has risen significantly. Given the scars left by COVID-19 and fallout from the war in Ukraine, we expect longer-term growth will likely be lower than before the pandemic.

To transition to a sustainable world for future generations and help make it more resilient to shocks like pandemics and war, policymakers must advance three key structural remedies: reducing divergence, accelerating digitalisation and decarbonisation. The ultimate aim is a green, more inclusive and digital economy. Insurers have a key role to play in each.

With respect to divergence, insurance can reduce income inequalities by reducing inequality of outcomes after shock events. One outcome of the pandemic has been heightened awareness of the value of risk-protection solutions, a development that will have lasting resonance as driver of insurance demand. How will this help? Insurance provides financial relief when catastrophes occur, softening the blow for those in harm's way.  For instance, re/insurers including Swiss Re have covered billions in claims from tragic COVID-19 mortality, helping families when they needed it most. With affordable solutions, insurance can benefit all segments of society and strengthen economic resilience.

The pandemic has also accelerated the digital transformation of society. COVID-19 lockdowns drove consumers online for their everyday needs, including insurance. Consumers are now more comfortable with online transaction platforms, which bodes well in terms of increasing insurance sector reach going forward. Furthermore, beyond improving productivity and sustainable growth, digital technology is integral to insurance product design. For example, in response to supply chain disruptions during the pandemic, insurers are increasing their digital technology and data analytics capabilities to better understand supply chain risks and to design associated covers, including contingent business interruption and non-physical damage covers. In this way, innovative insurance solutions can become a foundation of greater resilience.

Finally, the insurance industry plays a crucial role in supporting global decarbonization. Mankind faces an existential threat from climate change. With a warmer climate expected to lead to more frequent and intense severe weather events, the industry offers solutions to manage the financial fallout from natural catastrophes – and help speed recovery. As a source of long-term capital, the industry can also help support investment in green infrastructure for a sustainable future.

The enduring shock of the COVID-19 pandemic left the global economy more vulnerable, as the war in Ukraine has tragically demonstrated. These twin calamities have heightened the urgency to tackle necessary structural reforms, so society is more resilient for when the next crisis hits.