Swiss Re has named stagflation as one of its main downside scenarios in a new note.
The reinsurance giant said that it saw stagflation, which it defined as ‘stagnant or declining output alongside higher inflation’, as being a temporary state if it occurred, given that it would be driven mostly by cyclical factors.
It wrote: “The conflict in Ukraine has caused the sharpest increase in key commodity prices in decades. The euro area, where growth rates are cyclically and structurally lower compared with the US, is at higher risk of being pushed into an outright GDP contraction. We also see quarterly US GDP growth dipping below potential in the second half of 2022, although monthly job gains and wage growth both remain very strong.”
It added: “If global stagflation were to happen, we believe it will be a temporary state of affairs as it is being driven mostly by cyclical factors. Today the world does not face the kind of 1970s-style structural stagflation that caused great economic pain over a longer time. Ultimately, we expect the combination of current cost-push inflation and central bank policy tightening to subtract from global GDP growth, this contributing to lower inflation in 2023.”
Amongst the other key takeaways in Swiss Re’s note were that commodity price shocks are set to push inflation higher and slow growth; higher prices will continue to exert pressure this year and slow growth and lower inflation in 2023; high inflation, plus low growth, is not a stable long-term equilibrium unless central banks choose to allow it; and big changes in policy direction could turn stagflation structural, even if 1970s-style stagflation is avoided.
Swiss Re added: “In the near-term, cost-push inflation could raise property claims; late 2022/2023 could see an increase in lapse and surrender rate on existing portfolios.”
The reinsurer said that even if the current situation were cyclical, this would present certain problems to consumers with high inflation in the near future, followed by low growth.
It added: “Cost-push inflation this year translates into higher construction costs and property claims. In the medium term, higher wages tend to be sticky, and pass through to casualty line where claims severity is linked to loss of incomes over time as growth slows. Lapse and surrender rates on existing portfolios could rise first as new policies offer higher returns, and then as economic growth falls in late-2022/2023 making it harder for household budgets to meet higher debt servicing costs.”
This is not the first time that Swiss Re has warned on stagflation. Back in November, it warned of severe stagnation scenarios and how they could hurt insurers. And, earlier this month, the insurer said that the outbreak of conflict in Ukraine had led to a worsening in the global economic outlook.
The piece was authored by John Zhu, chief economist for Asia, and edited by Jérôme Haegeli, group chief economist for Swiss Re.
