POL I CY The Israeli Insurance, Pension & Finance Newspaper 10 Special edition 2022 Last year, the global economy recovered strongly from the pandemic-induced recession in2020. Vaccine rollouts and unprecedented levels of fiscal stimulus that cushioned the economic blow of lockdowns were powerful demanddriving forces. However, the recovery was cyclical, not structural. The COVID-19 crisis created longterm structural challenges, leaving the global economy with less shockabsorbing 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 lowpaying jobs such as in hospitality and retail hit harder than higherpaid 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 our Swiss Re Institute colleagues 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. Managing the post-COVID world has become more complicated Without a doubt, the conflict in Ukraine has further darkened the outlook. According to the Swiss Re Institute 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 The long road to recovery and resilience 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 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 By Hillel Damelin Head Client Management L&HMEDI, CEO Swiss Reinsurance Company – Israel Branch Continued on the page 39
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