'Zombie' companies, income inequality threaten the post-COVID era
In a new report, Swiss Re identifies the emerging risks that will shape the post-pandemic risk landscape.
As the U.S. and other nations progress through post-pandemic economic recovery, many of the issues that arose in the past year will continue to shape the future risk landscape.
Swiss Re identified those threats in its new “SONAR 2021: New Emerging Risks Insights” report released on June 8.
“When COVID-19 emerged in late 2019, few could have predicted the magnitude of its impact,” said Swiss Re’s Group Chief Risk Officer Patrick Raaflaub in a statement. “Many of the actions taken to mitigate the pandemic have themselves created new risks, from the widening inequality gap to the dangers of restarting under-maintained industrial operations. As re/insurers, it is essential that we have the best possible understanding of these emerging risks. It is also important to remain vigilant on the emerging risks that are already known — especially regarding climate change — as these will impact us for years to come.”
Emerging risks: Income gaps and struggling companies
Our society’s period under strict lockdown offered a troubling perspective at the differences in privilege between high- and low-income earners.
“While many white-collar workers were able to move to home offices and continue their work, lower-wage face-to-face service sectors such as retail, gastronomy and tourism experienced high unemployment,” said Swiss Re in the SONAR report.
For example, unemployment in the U.S. leisure and hospitality sectors skyrocketed from 5% at the beginning of 2020 to 40% by April 2020. For comparison, unemployment in these same sectors in the U.K. peaked at 10.9% in 2020 due to the country’s job retention program.
Although income inequality is largely viewed as an issue unique to developing nations, Swiss Re stresses that is simply not accurate, adding that COVID disproportionately impacted younger generations already struggling with pressured labor markets and lack of career opportunities. Citing data from the Pew Research Center, Swiss Re noted that the growth of the global middle classes was 54 million people fewer than projected in 2020. However, in the U.S., federal relief aid helped temporarily increase the incomes of low-wage workers during the pandemic.
The same legislation that assisted individuals and families also offered relief to struggling businesses. While the government’s stimulus program helped many viable companies stay out of the red, it also propped up non-viable organizations, dubbed “zombie companies,” Swiss Re explained.
“Zombie companies are a potential burden for the financial sector, especially when it comes to increased credit default rates. Low-interest rates are incentivizing companies to take up bank credit, creating a risk of large-scale defaults on these loans once government support dries up and zombie companies become insolvent,” said Swiss Re.
The global reinsurance company recommends that governments should carefully decide how and when to withdraw stimulus packages to avoid a potential surge of defaults and bankruptcies. Additionally, policies must have a focus on supporting businesses that are viable in the long run and facilitate the orderly restructuring of non-viable firms.
Visit Swiss Re’s website for more insights from the SONAR 2021 report.
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