Lessons to remember from a year to forget
With an extraordinary year coming to an end, I'm really looking forward to the economic recovery in 2021. But equally, reflecting our main Swiss Re Institute's economic research findings this year, I also believe that a policy reset is needed, both to make our societies fit for the future and growth more inclusive.
Growth is snapping back next year, the Year of the Ox in China, as we see a strong recovery on the horizon in Asia. That said, much of the recovery is due to re-opening of our economies and thus patience will still be needed as there is a possibility that the growth upturn will be less strong and sustainable than many believe.
Notwithstanding the cyclical and structure macro picture, our analyses point to one key takeaway: there's an enormous opportunity, and much untapped potential still – for insurers and policymakers alike to rebuild better and replenish global resilience for the longer term. That's why building back better will be a key theme of our research next year.
In our new end-of-year Economic Insights 2020 compendium, which comprises all 38 Economic Insights (EIs) published in 2020, we look back at a year unlike any other – a year that taught us that our economic "tool-kit" needs constant adaptation as we respond to quickly changing circumstances.
Let me highlight a few findings from our EIs that I think will remain extremely valid in the new year:
1. We need fiscal action and coordination, as a fiscal cliff is still a key risk in 2021
On March 12 (Issue 5), we published the EI Economic Resilience in Action Now. In it, we raised the point that the Euro Area is more exposed than the US, having less fiscal and monetary space, and that global policy coordination is vital now. In fact, we saw the biggest fiscal and monetary expansion in history this year, with the level of fiscal and monetary stimulus this year about as large as all emergency packages over the last 50 years combined.
Now, as Europe falls again into a recession due to the latest lockdowns and the US continues to face a challenging situation, we cannot afford a hard fiscal stop next year. Preparations for a fiscal exit are badly needed. This means coming up with better frameworks to deploy equity-like instruments and allowing quicker and orderly bankruptcy restructurings.
2. To fight COVID-19, strict and swift responses will remain key (even with a vaccine)
As we stated in our 12 May EI issue Lessons from past pandemics, the learnings from the 1918 Spanish flu still ring true today: "quick and aggressive non-pharmaceutical interventions do not worsen the economic downturn" compared to not constraining economic activities. The findings from the 1918 flu across states are still relevant today, as the debate is also heating up in Switzerland.
3. Keep paradigm shifts in mind
Pandemics are not "black swan" events, although no one thought that the entire global economy would have to be shut down simultaneously to restrict mobility. While COVID-19 has an expiry date, the biggest economic crisis in our lifetime will accelerate the paradigm shifts that were already in the making before the crisis started: a larger role for governments, accelerated digital transformation, de-risking of global supply chains and new distribution policies in the making. The latter are designed to tackle the growing structural imbalances masked by the aggregate macroeconomic statistics, as income inequality continues to rise. We cover these issue in greater depth in our EI issue 14 on Longer term implications of COVID-19.
4. The disconnect between macro and markets is real and they are going separate ways
In our EI issue 17 "Going separate ways?", we discuss the disconnect between the performance of risk assets and the real economy. A number of factors explain the seeming disconnect, with central bank actions being the most important one.
Looking to 2021, I find it hard to see what could disturb the disconnect other than changes in policymakers' goals and/or surprises on the inflation front. I am not concerned about how aligned economic views and associated investment strategies are for 2021. But there is no question in my mind that existing market vulnerabilities – currently masked by record low interest rates – could manifest once again, brought to the surface either by a change in strategy by today's market makers (the central banks) or a surprises shift in their targets (inflation).
By the end of 2020, the debt-to-GDP ratio in the US will have tripled to over 100 percent of GDP. As a share of GDP, however, the cost to service debt has fallen since 2000 and this is thanks to rock-bottom interest rates. The stock of debt still matters and so do interest rates!
Have a look at the crossword puzzle: some holiday fun for readers of Swiss Re Institute's Economic Insights or our sigma and Expertise Publications series – or just for anyone with an interest in general economics. Spoiler alert: There are no prizes, but we will share the answers as an appendix to the first edition of Economic Insights in 2021.