Global economic stagnation could cost $5.2tn
Source: Middle East Insurance Review | Mar 2024
A new model released by Lloyd’s research and insights platform Futureset estimates the potential five-year global economic impact of the economy slipping into stagnation as $5.2tn.
The new systemic risk scenario model developed by Cambridge Centre for Risk Studies and Lloyd’s, models the potential GDP impact of a prolonged period of economic stagnation on businesses and communities and highlights the role of insurance in building greater societal resilience.
The scenario looks at the economic shock of a sudden collapse of an important industry and the effect across connected sectors and countries, resulting in a prolonged global downturn. The resulting impacts include a significant restriction in industrial productivity and innovation, increased unemployment levels and a drop in consumer earnings and spending.
The financial sector is identified as being at biggest risk of the events described, as well as the retail, industrial and utilities sectors, which could be exposed to slowing revenues and cashflow challenges.
The regional impacts over the five-year period would be greatest in North America, with losses under the scenario estimated at $1.6tn followed by Europe at $1.4tn and Greater China with a GDP impact of $972bn.
Over the last 60 years, major economies have only been in stagnation 3% of the time. When stagnation becomes sustained and widespread, regional events can evolve into a globally significant downturn which, without stimulus measures, could descend into a recession.
Insurance has a significant role to play in protecting businesses from many of the risks that businesses can face during periods of economic uncertainty including trade credit, mergers and acquisitions and political or cyber risks.
Using global GDP as its central measurement, the Lloyd’s and Cambridge model estimates the global economic impact of the economic stagnation scenario as:
- The global economic impact over a five-year period (the weighted average across the three severities modelled) will be $5.2tn.
- The global economic impact ranges from $4.6tn in the lowest severity scenario up to $16.9tn in the most extreme scenario. $62bn is the expected global economic loss (the sum-product of the five-year economic loss and the probability of the event occurring). M