The world economy has been shaken by the COVID-19 crisis as countries deplete their fiscal and monetary reserves.Excerpts from a new Sigma Resilience Report from SwissRe, revels profound shifts in consumer response. The article was written by Irina Fan, Head Insurance Market Analysis, Swiss Re Institute & Patrick Saner, Head Macro Strategy, Swiss Re Institute & Thomas Holzheu, Chief Economist Americas, Swiss Re Institute & Fiona Gillespie, Economist Macro Strategy, Swiss Re Institute. Access the report here.
Our latest annual resilience indices show profound shifts in economic and household resilience from the COVID-19 pandemic. The crisis is expected to reduce global macroeconomic resilience by close to 20% in 2020 as governments use up fiscal and monetary headroom with stimulus measures. Post-COVID-19, we expect the global economy to be almost 30% less resilient than in 2007 than before the global financial crisis (GFC).
Among major economies, the UK, Japan and the US will see fiscal buffers depleted most and their resilience index scores decline furthest, although they should still rank higher than many European countries.
COVID-19 Set To Widen The World’s Protection Gap
Insurance resilience weakened in 2019, the indices show, pushing the combined insurance protection gap for mortality, health and natural disaster risks to a new high. The global insurance protection gap for health, mortality and natural catastrophe risks reached USD 1.24 trillion in 2019, with health and mortality exposures accounting for more than 80% of the total.
We expect the COVID-19 crisis to increase health and mortality protection gaps as households grapple with lower incomes, higher healthcare costs and the financial consequences of losing a breadwinner as a result of the pandemic.
Excerpts From the Sigma Resilience Report 2020
Macroeconomic Resilience–Focus On Replenishing Depleted Reserves
The global economy went into the COVID-19-induced recession with less capacity to absorb shocks than prior to the global financial crisis (GFC) of 2008–09, the last major economic downturn. About 80% of countries in our annual SRI Macroeconomic Resilience Index posted lower scores for 2019 than for 2007, and 45% significantly lower. Globally, resilience in 2019 was stable compared to 2018. We expect the policy responses to COVID-19 to lower global economic resilience in 2020 by almost 20% from 2019.
The global index value drops to 0.50 by our estimate, from 0.62 in 2019. In relative terms, this fall is similar to that seen at the time of the GFC, but far more rapid: during the GFC, the same scale of decline took three years to materialize. We expect China’s resilience to be largely unchanged in 2020. Its economy has needed less stimulus than many others after the government implemented strict and rapid virus containment measures that were then lifted earlier than elsewhere. In contrast, the size of the fiscal and monetary packages announced in the US and Europe exceed all bailouts of the past 50 years combined.
While these have offset some of the output losses, lockdowns in most countries continue to suppress economic activity. This counter-effect from containment measures makes it harder to predict the effect of stimulus measures on future GDP growth.
Replenishing Resilience For The Future
Improving long-term growth prospects and replenishing economic resilience need to be top policy priorities for societies. The global economy no longer has the luxury of relying on monetary and fiscal levers alone. Alternatives should include structural reforms that strengthen resilience, such as targeted investments into sustainable infrastructure, the digital economy and the transition to a low-carbon economy.
Governments should also work to limit rises in inequality, foster human capital, deepen the liquidity and dynamism of financial markets, and improve the efficiency of labour markets. Determining the drivers of country and global shock-absorption capacity is a continually-evolving exercise. Accordingly, we will review the methodology of the resilience index as part of our next update in 2021. This will include a further refinement of the weights associated with each component of the index and the introduction of additional data series to incorporate broader societal resilience indicators.
The Global Insurance Protection Gap Remains Elevated
The combined world protection gap for catastrophic health, mortality and natural catastrophe risks continues to test record highs, rising marginally to a new high of USD 1.24 trillion in 2019. Health risk contributed most (47.3%) to the total gap, followed by mortality (34.4%) and natural catastrophe (18.3%). More than 60% of the global gap originated from emerging markets, particularly emerging Asia-Pacific.
The annual SRI Global Composite Insurance Resilience Index (I-RI), which aggregates the three resilience sub-indices, was stable at around 54% in 2019 but with large regional differences: the most resilient region, North America, had an I-RI of 64.8%, and the least resilient, emerging Asia-Pacific, one of just 34%. We expect resilience worldwide to decline in 2020 as households grapple with lower incomes, greater healthcare costs and the consequences of higher excess mortality, due to the COVID-19 pandemic.
More key findings from our indices include:
- Global macroeconomic resilience was stable in 2019, but the world economy was less resilient going into the COVID-19 crisis than it was before the GFC of 2008-09, the last major downturn.
- China’s economic resilience score is relatively unchanged, primarily because a swift response enabled it to reopen its economy earlier than many others.
- Switzerland, Finland and Canada remain the world’s three most resilient economies, reflecting their comprehensive economic strength against future crises.
- We expect COVID-19 to put health resilience in the spotlight in 2020. The impact will vary depending on countries’ health infrastructure and virus containment policies, but emerging markets will likely be more vulnerable given typically lower health resilience.
- Global mortality resilience declined most in 2019, driven by Asia-Pacific; health resilience was stable despite some deterioration in emerging markets. Natural catastrophe resilience was lowest of the three risk areas.