Asset prices on steroids, but interest rates will stay low: a chief economist looks ahead

Economists have the luxury of seeing the world in the macro, of being able to see from overheard the great shifts and changes in how the global economy operates.

The last 18 months have been tumultuous, possibly more so than any other in living memory, with lockdowns, travels bans, furlough schemes, and entire sectors shutting down more or less overnight.

To talk about this and look forward, Jérôme Jean Haegeli, group chief economist at Swiss Re, sat down at the Re/insurance Lounge, Intelligent Insurer’s on-demand platform for interviews and panel discussions with industry leaders, to talk about the large trends and shifts that he foresees not just in the insurance markets, but across the whole world.

“I’m a big believer in structural factors and I think that interest rates will remain low.” Jérôme Jean Haegeli, Swiss Re

Recovery on the horizon

“When we think about the economic outlook, the one thing to remember is that an economic recovery is not a sprint, but a marathon. In addition, a rebound is not a recovery,” Haegeli said at the end of August, around the time that the European Central Bank reported that inflation across the continent had topped 3.4 percent, much higher than the institution’s ongoing target of 2 percent.

“The biggest risk out there is that our economies are overheating, and that we’re getting higher inflation. It wouldn't be good for insurance markets and certainly not good for society.”

When Haegeli spoke on the Re/insurance Lounge, he expressed surprise at the strength of the economy, but cautioned about whether the momentum would be maintained expressing below consensus forecasts.

“As the economy has reopened there’s been this extraordinary cocktail of economies reopening, together with the stimulus and pent-up demand. That’s really driving growth across the regions.

“We forecast growth of about 6 percent for the US, which is much higher than normal—it’s about triple the normal speed,” he said.

That may sound good, but Haegeli warns against such optimism.

“It’s a cyclical recovery,” he said. “It’s a rebound, and we have to see where the momentum goes. But the good news this year and possibly next year is the global economy is still in a rebound mode, even if it is slowing down.”

The industry obviously looks closely at what happens in the world economy. Haegeli said that there are three things that he would pick out as particular themes: growth, inflation, and the interest rate.

The rise in premiums, said Haegeli, had been strong, the result of which would be positive for growth. “If you look at our latest sigma world insurance report, we expect global insurance market premiums for direct insurance to break $7 trillion for the first time next year. That is extremely significant and positive.”

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Inflation and interest rates

The second point Haegeli raised was inflation. As mentioned above, inflation topped 3 percent in Europe at the end of August. The same week, Germany said that inflation within its borders had hit 3.9 percent year on year, the highest in nearly three decades.

“There’s high inflation in the US of 5 percent,” said Haegeli. “Even in Europe, it’s above 3 percent so we’re definitely in a high-inflation environment. The question is how temporary or how permanent it will be.

“My take on it is that there will be no runaway inflation, but we will still have inflation that’s higher after COVID-19 than it was before. That’ll be important when it comes to pricing.”

Interest rates were third on his list.

“It’s super-interesting,” Haegeli said. “Even though you’re seeing a global economic recovery and asset prices on steroids, you don’t see interest rates going up. I’m a big believer in structural factors and I think that interest rates will remain low.

“If that happens, let’s not forget that insurers are long-term investors. We get the yield from the assets under management and if interest rates are lower for longer, you get lower running yields. If you get that situation, you need to do more on the underwriting side.”

Haegeli offered his prediction on interest rates. “Ten-year interest rates in the US today are around 1.3 percent. I don’t think they’re going to increase much by the year end. Our forecast is 1.4 percent for the end of the year. For next year, it’s 1.6 percent.”

When it comes to opportunities for the insurance industry, Haegeli pointed to those brought about by the efforts to combat climate change. This is not surprising, given that ethical investing with environmental, society and corporate governance factors has been the success story of 2020 and 2021.

“There’s a sea-change in the minds of people,” he said. “It’s widely recognised that we need the recovery to be green. And you can only do that with the insurance sector being at the forefront, because it’s a provider of long-term funds.”

“The primary economics of it is that not taking action is not an option. Doing too little is also not an option. If we don’t act together on public policy and we don’t fulfil the Paris Climate Agreement, we’re going to see the global economy shrink. With meeting the Paris Agreement’s 1.5°C goal being literally on life support, the biggest costs of action is not doing more.”

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