Swiss Re calls for policies to strengthen private capital markets: Growth Recipes report proposes a raft of measures to boost economic growth

A decade has passed since the global financial crisis, with the economic recovery and growth outlook having since improved. However, long-term structural challenges remain, namely low interest rates, debt overhang, low productivity growth and demographics. For the cyclical growth upturn to be durable, the focus now should shift to implementing structural reforms, accompanied by cautious tightening of monetary policy.

Unforeseen outcomes

On the financial markets side, there has been a significant change in the landscape since the crisis. Central banks have now become the dominant market players. Their balance sheets have risen to unprecedented levels due to asset purchase programmes. Among other things, these developments have led to asset price distortions, changing market ownership from private to public players, the crowding out of many long-term oriented financial market participants and reduced market liquidity. Households, too, have suffered from the current public policy mix even after accounting for lower mortgage rates. In a number of countries, falling interest rate income was accompanied by an increase in the savings rate. 

In 2016, in the US alone, households lost more than USD 280bn in forgone interest rate income, which amounted to a cumulative USD 1.4trn from 2008 to 2016. French and German households had similar experiences. Institutional investors like pension funds and insurance companies have also suffered. For example, EU and US insurance companies' forgone yield income amounts to around USD 700bn since 2008, which could have instead driven new investment opportunities and guaranteed returns to policyholders. Over two-thirds of life-insurance policies in force in the EU today offer some sort of guarantee. According to the European Insurance and Occupational Pensions Authority, more than half these policies have promised a higher income to policyholders than insurers can currently earn on newly-issued bonds. This illustrates the challenge life companies face in meeting the promises made to policyholders.

What needs to happen

Instead of proposing more of the same, Swiss Re advocates introducing measures to strengthen private capital markets, implement structural reforms and bring in targeted fiscal stimulus. This would increase financial market resilience and boost economic growth in a sustainable manner. Concretely:

  • Public sector dominance in financial market pricing needs to be reduced.
  • Crisis policies should be unwound in an orderly manner and replaced by sustainable economic growth policies.
  • Policymakers should pursue a coherent and well-sequenced structural reform agenda in product and labour markets.

Given the significant influence capital markets have on economic growth, the Swiss Re report, "Growth Recipes: The need to strengthen private capital markets" proposes several such recipes”, for example a more growth-friendly policy mix, standardising infrastructure debt to become a more tradable asset class and more equity-like instruments, such as GDP-linked sovereign bonds.

Supporting financial resilience

Re/insurance supports financial resilience by acting as a shock absorber and promoting growth through its core businesses. This is particularly important in a challenging and volatile macro-economic environment.

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