COVID-19 has accelerated the trend of greater coordination of monetary and fiscal policies. Central banks (CBs) are buying large quantities of public debt to keep interest rates low. Some CBs have imposed explicit caps on bond yields.
There is increased likelihood of still greater coordination between CBs and governments (for example, "helicopter money").
Why it matters: An environment of financial repression with low investment yields is challenging for long-term investors, including re/insurers.
Key to watch: interest rates, real yields, CB policies and policy frameworks.
COVID-19 may speed up the trend towards de-globalisation that has occurred since 2008, when global trade as a share of global GDP peaked.
Pandemic-driven supply chain disruptions will likely translate into companies restructuring global supply chains to make them more resilient to shocks.
US-Chinese trade tensions are likely to continue, leading to protectionist measures and the development of parallel supply chains.
Why it matters: De-globalisation and protectionism have a negative effect on global growth and could add to inflationary pressures.
Key to watch: Number of protectionist interventions, changes in tariffs & investment regulations.
De-globalisation and demographic shifts could reverse the trend over recent decades of falling and low inflation.
The vast debt accumulated during the pandemic increases long-run inflation risks. Governments have an incentive to inflate away the elevated debt burdens.
The US Fed has adjusted its policy framework to allow periods of inflation target overshoot to compensate for times of low inflation.
Why it matters: : Higher inflation could lead to a spike in bond yields as CBs fall behind the curve. Unexpected inflation could inflate re/insurers' claims.
Key to watch: (core) CPI, nominal wage growth, central bank policy frameworks.
Ultra-accommodative monetary policy by major CBs is increasing the wealth gap between asset holders and workers. We also expect COVID-19 to add to inequality by widening income gaps between high and low earners.
Concentration of wealth tends to result in lower aggregate consumption and investment.
A rise in populism and political polarisation may lead to worsening political conflicts and instability.
Why it matters: Inequality weakens social cohesion. Political instability increases the likelihood of a crisis and lowers potential investment. Policy mistakes decrease economies' economic resilience.
Key to watch: global GINI coefficients, (relative) poverty rate/gap, tax policies.
COVID-19 and the prolonged low interest rate environment will lead to more zombie companies (i.e., highly leveraged and unproductive firms).
Keeping non-viable companies afloat helps avoid a credit crisis in the short term but does not reduce the long-term risk.
Why it matters: Zombification weighs on long-term growth as unprofitable companies are kept afloat.
Key to watch: number of zombie firms, output per worker/hour, real GDP per capita growth.
Public and private debt burdens have risen sharply, creating potential need for a large share of fiscal income to be used to service debt.
This limits the ability to finance critical investment (e.g. in healthcare, education, infrastructure, etc.). It also reduces governments' room to react to crises, limiting resilience.
In addition, it may increase the risk of debt restructuring or default.
Why it matters: High debt burdens, limiting necessary investment, usually result in lower growth for a prolonged period of time and can lead to debt crisis.
