Zombie companies, income inequalities threaten the post-COVID era

Swiss Re’s new SONAR 2021 report addresses the long-term effects of the COVID-19 pandemic on individuals and businesses around the world. (Photo: Shutterstock)

As the United States and other countries move forward in post-pandemic economic recovery, many of the issues that have arisen over the past year will continue to shape the future risk landscape.

Swiss Re identified these threats in its new report “SONAR 2021: New Emerging Risks Insights” published on June 8.

“When COVID-19 emerged at the end of 2019, few people could have predicted the magnitude of its impact,” Swiss Re Group Risk Director Patrick Raaflaub said in a statement. “Many of the measures taken to mitigate the pandemic have themselves created new risks, ranging from widening the inequality gap to the dangers of restarting under-sustained 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 emerging risks that are already known, especially with regard to climate change, as they will impact us in the years to come. “

Emerging risks: income gaps and struggling companies

Our society’s period of strict confinement has offered a troubling perspective on the differences in privilege between high and low incomes.

“While many white-collar workers have been able to move to home offices and continue working, low-wage face-to-face service sectors such as retail, food and tourism have experienced high unemployment,” Swiss Re said in the SONAR report.

For example, unemployment in the leisure and hospitality sectors in the United States fell from 5% in early 2020 to 40% in April 2020. By comparison, unemployment in these same sectors in the United Kingdom has peaked. to 10.9% in 2020 due to continued employment in the country. program.

Although income inequality is widely seen as a problem unique to developing countries, Swiss Re emphasizes that this is simply not accurate, adding that COVID has had a disproportionate impact on younger generations already struggling with markets. work under pressure 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 fewer people than expected in 2020. However, in the United States, federal emergency aid helped temporarily increase the incomes of low-wage workers during the pandemic.

The same legislation that helped individuals and families also offered relief to struggling businesses. While the government’s stimulus package has helped many viable businesses stay out of the red, it has also supported unsustainable organizations dubbed “zombie businesses,” Swiss Re explained.

“Zombie companies represent a potential burden on the financial sector, especially when it comes to increasing credit default rates. Low interest rates encourage companies to take out bank loans, creating the risk of large-scale default on these loans once government support dries up and zombie companies go insolvent, ”said Swiss Re. .

The global reinsurance company recommends that governments carefully decide how and when to withdraw stimulus packages to avoid a possible increase in defaults and bankruptcies. In addition, policies should focus on supporting viable long-term enterprises and facilitating the orderly restructuring of non-viable enterprises.

For more information on Swiss Re’s SONAR 2021 report, Click here.


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