In the poly-crisis era, what are the odds of stagflation?

Often described by Canadian property and casualty risk professionals as ‘uncertain,’ ‘volatile,’ and even just plain ‘weird,’ the post-pandemic era now has a name — we’re in a poly-crisis.

“Here’s a short definition of what poly-crisis means — it comes from the World Economic Forum,” said Gianfranco Lot, chief underwriting officer of P&C reinsurance at Swiss Re. He was the keynote speaker at the 38^th annual Swiss Re Breakfast held in Toronto Tuesday.

“It’s a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each of the individual crises.”

Lot referenced a World Economic Forum study conducted in 2022. It canvassed the opinions of more than 1,200 leaders in the academic, business, government, international community and civil society sectors.

“Eighty percent think they will have to manage multiple crises at the same time,” Lot reported. “There’s a consensus that there’s a lot going on in our world.”

The same study suggests 50% of leaders will think the same 10 years down the road. But only time will tell.

In the meantime, insurers across the globe are dealing simultaneously with multiple risks, all of which connect with each other.

The World Economic Forum’s global risk map groups risks into five basic categories — technological, environmental, geopolitical, societal and economic.

On the economic front, Lot touched on the risk of a stagflation scenario happening in North America. That’s a blend of a recession (two quarters of negative economic growth), high inflation and high unemployment.

Related: Remember 1970s stagflation? Why insurers should pay attention to the World Bank

“The probability we attach to a stagflation scenario is relatively low, it’s 15% to 20%,” Lot told Canadian Underwriter after the breakfast. “The probability that we’re attaching to a recession is higher — it’s 40%.

“In a recession, you tend to think — but you don’t know, right? — that the reserve bank will cut [interest] rates to stimulate the economy. You could have a situation where…supply chain issues and oil and gas pricing fuel inflation, and yet you still face a recession. And even the cuts from the reserve bank are not enough to stimulate the economy. You could see such a scenario.”

In Canada, during the 1970s and 1980s, stagflation at its peak contributed to a national unemployment rate of 13% and an inflation rate, as measured by the Consumer Price Index, of 12.8%.

Today, those numbers are more like a 6.1% unemployment rate in Canada (up from 5.1% last year) and a 2.9% CPI reading (down from 3.9% a year ago).

In Canada, Lot said in his keynote address, there haven’t yet been two consecutive quarters of negative growth.

“I just want to point out the economic downturn is a real, real scenario,” he cautioned. “I know that two consecutive negative quarters of GDP is defined as an economic downturn. You haven’t had this in Canada. We haven’t had this in Switzerland (where Swiss Re is headquartered).

“But you have one quarter [of negative GDP growth], and then it’s picked up again. And another quarter [of a downturn], and then it’s picked up again.

“Our prediction for the U.S. is a 35% [probability of] an economic downturn or recession. So, it’s something that is looming out there.”

One of the drivers behind inflation is the disruption to supply chains, Lot observed. And all of the five risk categories are connected to that in some way.

For example, NatCats and extreme disasters affect supply chains, as do breakdowns in infrastructure, which in turn may be caused by geopolitical conflict.

“CPI has come down from a peak of 8+% to 2.9%. Good? Great,” said Lot. “But with all the crises that we’ve seen before, the supply chains may be affected again….

“So, for this [inflation] risk, the central bank has done a great job in increasing rates never before attempted. Unprecedented. Never before have they increased rates so fast to combat inflation.”

 

Feature image courtesy of iStock.com/Pla2na