We live in an increasingly uncertain world. Political turmoil, climate change and the rise of antibiotic-resistant infections are just some of the threats to our future. To say nothing about the growing signs of a global economic slowdown.
So what are society’s chances of surviving and bouncing back from any of these shocks? The new Swiss Re Institute and London School of Economics Macro Resilience Index, published in the Swiss Re Institute's latest sigma report Indexing Resilience, provides fresh insights to answer that question.
The index ranks 31 countries in order of their ability to absorb a range of “shocks”, including natural disasters and financial collapse. It measures nations against nine benchmarks, each with a different weighting. The index reveals that even the most resilient states have work to do to in some areas. One of the key points of our analysis is that improving economic resilience domestically has positive spillover effects globally, especially for economic heavyweights like the United States.
But what makes the countries in the top 10 more resilient than others? And what can both developed and emerging economies learn from them?
Top 10 countries
The Swiss may seem to have it all when it comes to resilience. But a closer look reveals interesting insights. To be sure, the government’s sound finances mean it has strong fiscal buffers to intervene if things go wrong.
Companies and individuals are well insured with 72% of risks covered. Financial markets, human capital, the economy and banks are also strong, and the labour market works efficiently.
But the index score for the ability of the central bank to tighten or ease monetary policy is very low. Index rankings run from 0 to 1 and Switzerland’s monetary policy score is 0.1. The Swiss National Bank was one of the first to adopt negative interest rates – charging depositors to hold their money – in the hope of encouraging individuals and companies to spend. Six months ago, the bank issued a new 1,000 franc note, which fuelled fears citizens are choosing to hoard cash rather than pay negative rates.
Canada enjoys sound banks, plenty of fiscal headroom, strong human capital and an efficient labour market. Financial markets are among the strongest in the world, but the monetary policy space is also quite constrained on an absolute level, although it still has a little more space than is the case in Switzerland.
In common with most other developed economies, the fact is that the Bank of Canada has only limited room for manoeuvre in responding to economic shocks. The Bank is focused on controlling inflation by using a target interest rate at which banks can borrow from one another, the so-called interbank rate. This rate has been set at 1.75% since October of last year. This means that the BoC does not have much space left in case of a recession to lower interest rates substantially before they go to zero or even negative.
Commentators conclude this limits the country’s ability to use monetary policy as a tool to respond to major events. That said, the economic growth rebounded from a dip at the end of last year and observers concur with the bank’s optimism about a return to steady growth over the next few years.
3. United States
As the largest economy in the world, you might expect the US to be resilient. It scores well on all index measures, including achieving a better monetary policy rating than the two leading nations of 0.21. The US also has one of the most efficient labour markets on the planet.
But its overall score suffers due to its highly carbon-dependent economy, which makes it vulnerable to the disruptive effects of climate change, including the impact on global supply chains and infrastructure.
Finland’s financial markets might be less developed than those of the much larger US, but it scores highly on having a low-carbon economy. Driven by a target to reduce CO2 emissions by 80% by 2050, the country has focused on reducing energy consumption and greening its energy supply.
The number of electric vehicles on Finland’s roads has leapt up in the past three years. More than a third of the nation’s electricity comes from renewable resources, and a further 30% from nuclear power.
Almost nine out of 10 risks in the Finnish economy are covered, giving the nation one of the highest scores in the index.
Like some other major oil and gas producers, Norway has built a sovereign wealth fund to help it weather global shocks. Ironically, it is also a very low-carbon economy.
In March this year, 60% of all new vehicles registered in Norway were electric and the nation hit its target of having 50,000 new electric cars registered three years ahead of schedule. Even cruise ships entering the famous fjords will have to be electric powered from 2026 when they become zero-emission zones.
Norway’s high index score on low-carbon economy is only one of the reasons for its lofty position in the table. Sound banks and strong financial markets help too. But Norway’s insurance penetration rate is low, partly reflecting its universal state healthcare system.
6. United Kingdom
Recent political turmoil in the UK over its membership of the European Union aside, it scores highly on all elements of the index, except monetary policy, where room for manoeuvre is restricted by an already low central bank interest rate of 0.75%. The UK’s labour market is ranked as one of the most efficient in the table.
The Dutch economy grew 2.5% last year. But as a major trading hub for Europe it is vulnerable to a slowdown in the Eurozone economy and growth is expected to slow in 2019. Despite investments in clean energy in recent years, the Netherlands’ score for low-carbon economy is 0.5. Most of the nation’s electricity is generated by coal-fired stations and its target for 2020 is to have a comparatively modest 14% of its power generated by renewable sources like wind, solar and biomass.
Denmark is a well-insured country, scoring 0.95 for insurance penetration. It is also one of the leading low-carbon economies in the world, with a target of being entirely carbon free by 2050. Its score for financial market development is one of the lowest among leading nations at 0.16.
Our analysts argue strongly that, for the Eurozone, completing the Capital Markets Union is the key to increasing resilience.
Japan scores the index’s top rating for economic diversity and human capital but years of borrowing to finance a gap between tax revenues and public spending have somewhat limited the government’s ability to respond to shocks with fiscal measures.
Sweden’s GDP per capita is among the highest in the EU with inflation below 2%. Its banks are strong. Sweden recovered from a serious financial crisis in the 1990s when two banks were nationalised, government spending, borrowing and unemployment ballooned. The keys to recovery included a cap on public spending and bold market reforms.
Macro Resilience Index – component breakdown
- Fiscal space (35%) An estimate of a country's fiscal leeway. This includes the level of government debt as a percent of GDP, sovereign debt rating, and real GDP growth.
- Monetary policy space (15%) Measures the ability of a central bank to ease or tighten monetary policy. Monetary policy is a key policy instrument to absorb economic shocks.
- Banking industry backdrop (18%) A survey of executives that indicates how sound a country's banks are generally considered to be. This includes capital buffers, the operating environment, the business model, the macro environment, etc.
- Labour market efficiency (12%) Includes flexibility of wage determination, hiring and firing practices, capacity to retain talent, and female participation in the labour force. Efficient and dynamic labour markets allow for easier reallocation of workers during times of stress.
- Financial market development (10%) This is a summary of how developed financial markets are in terms of depth, access, and efficiency.
- Economic complexity (4%) A holistic measure of the sophistication and variety of goods produced and exported by an economy. It shows the breadth and depth of production capacity.
- Insurance penetration (2%) Swiss Re Ratio of total (life and non-life) direct insurance premiums to GDP. Insurance acts as a shock absorber and smoothens financial volatility.
- Human capital (2%) Gauges how health and education shape the productivity and social mobility levels of a country. High social mobility and skill levels make a country more dynamic to cope with and adjust to shocks.
- Low-carbon economy (2%) Measures the extent to which a country already is a low-carbon economy (low-fossil-fuel or decarbonized in terms of output/emissions). Climate change has disruptive effects on global supply chains and infrastructure.