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CORPORATE | 04.23.2020

MAPFRE Economics forecasts a contraction in the world economy of at least 3 percent and warns of high debt levels

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  • MAPFRE’s economic research service considers a stress scenario in which GDP could contract by 8.2 percent
  • It forecasts a more negative scenario for emerging economies, due to vulnerabilities accumulated over the last decade

MAPFRE Economics, MAPFRE’s economic research service, has sharply revised its forecasts for the world economy and expects an unprecedented impact on activity due to COVID-19. The insurance group experts say that we are facing an extremely uncertain scenario, in which it is impossible to anticipate the results of economic and social policy decisions. Its “Economic and industry outlook 2020” report, published today, adjusts the group’s estimates and covers a broad range from a base scenario to a stress base scenario. These may vary depending on the impact caused by the virus and the suppression or containment measures taken. Under these new criteria, which will be applied throughout the crisis, the experts expect the global economy to contract by between 3 and 8.2 percent this year. The report states that “the economic cost is enormous, which we are currently seeing due to supply disruptions, risk aversion and the potential financial implications.”

In this context, there has been a global synchronicity in the relaxation of monetary and financial conditions. However, this has been carried out in a markedly less coordinated and irregular way in terms of fiscal policy measures. These generally include direct and indirect stimuli, and guarantees that have ranged from 2 percent of GDP in some countries to 15 percent in others. The report’s base scenario of economic growth and inflation is therefore very negative for developed countries and even more so for emerging markets, due to the vulnerabilities accumulated over the last decade and the sharp contraction in foreign revenues, especially because of the fall in oil prices. 

Economic growth will reverse to a greater or lesser extent in 2021, bringing with it a bill for increased public debt of at least 15 percent of global GDP. On this, the experts stress the vulnerability associated with continued rise in global debt levels. Disrupted cash flows that impair debt-servicing capacity, with increasing liquidity alarms in the system, may ultimately lead to solvency problems on the banks’ balance sheets, turning the COVID-19 crisis into a systemic one. Meanwhile, governments attempting to stimulate their economies will run larger deficits, in an environment of weak borrowers who may react negatively to their obligations.

US GDP could fall from 4.1 to 10.8 percent (stress base scenario). MAPFRE Economics predicts that activity will restart gradually and conditionally from the second half of the year. “Sustained, visible growth will not be achieved until at least the end of the first half of 2021. The immediate impact of the crisis has been caused by disruptions to production chains, the unprecedented contraction in business activity, the tightening of family and SME incomes, and energy sector difficulties linked to fracking, which also echoes the sharp decrease in the price of energy due to the struggle between Saudi Arabia and Russia.”

China is returning to 2019 activity levels, as its coal consumption reveals. Even so, MAPFRE Economics believes that the return to normality will be gradual. “For now, it seems that industry activity is recovering but business and tourism will take longer,” it explains. On this basis, MAPFRE Economics forecasts a GDP contraction of 0.6 percent this year. However, in the absence of a new wave of infections, the economy will start growing again in the second half of the year, although the degree of structural damage from the closure of companies that fail to survive the general lockdown remains to be seen. In a stress scenario, the fall could be as much as 6 percent.

The report forecasts a contraction of at least 5.1 percent for the eurozone as a whole. This estimate depends on the duration and depth of the economic contraction, the effectiveness of health and economic support measures, and, most notably, on the scope of institutional commitments to finance the rescue of the region. A 12.4 percent drop could occur under the stress base scenario. MAPFRE Economics believes that “the virus is the eurozone’s greatest challenge since inception.”

For now, the ECB seems to be the only viable source of pooled assistance in the short-term. The discussion focuses on the feasibility, shape and conditions of possible pan-European rescue mechanisms, as well as the economic, political and structural consequences for the future of the Union, depending on the measures taken. The experts at MAPFRE Economics consider it positive that beyond the approved plan to tackle the challenges of the crisis, it will be necessary to create a reconstruction fund (equivalent to the Marshall plan) linked to European budgets. Thus, the principle of solidarity seems alive in the Union for the time being.

As for emerging Latin American economies, Mexico, which was already in recession in 2019, has also been adversely affected in the early part of this year by downward pressure on the crude market. Together with the devastating effect of the pandemic, this has impacted the Mexican economy differently, given its enormous commercial and industrial integration with the United States, and its major fiscal and industrial dependence on the energy sector.

Given the administration’s decision not to raise public debt levels, this situation leaves the government with little margin (beyond the direct transfer programs in place before this crisis) to introduce the type of fiscal stimuli implemented elsewhere to counteract the economic effects of the pandemic (on economic activity and employment). Given all of this, MAPFRE Economics expects the recession to worsen in 2020 and the Mexican economy to fall by at least 3.9 percent.

As early as January, Brazilian industrial production data pointed to a deterioration in the manufacturing sector, which has been precipitated with the arrival of the health crisis. MAPFRE Economics forecasts a fall of between 2.7 percent (minimum base scenario) and 9.9 percent (stress base scenario) for 2020. The expected recovery in 2021 is forecast to be weaker than hoped, because the crisis will also have political and institutional effects that impact automatic stabilizers. The report concludes that “Disagreements between the head of the government and other institutions are undermining the consensus reached in fiscal and other areas.”

Impact on the insurance industry

Like the economy, the insurance industry is experiencing an unprecedented situation. The report’s analysis of the worst economic crises of the forty years since 1980 shows that, overall, sharp declines in GDP lead to significant setbacks in insurance premiums at the aggregate level, in both emerging and developed markets. However, the effect is uneven across the different lines of business. Automobile, business, industrial and life insurance are the hardest hit and will suffer the short-term consequences of the crisis. Health insurance has remained very resilient in these situations, even behaving anti-cyclically at the worst times of the crisis. Homeowners and condominium insurance tend to slow down, without experiencing large setbacks. For traditional life savings and annuity insurance, the most unfavorable effect (with structural and medium- to long-term implications) is the low-interest-rate environment. This was previously a problem for economies in developed countries, but is spreading to emerging markets.

MAPFRE has renamed its Economic Research service MAPFRE Economics and updated its image to be more international, befitting a global service. MAPFRE Economic Research was created in October 2015 to become a global benchmark in public debates on insurance and social protection, macroeconomics and finance, and regulation.

MAPFRE seeks to use the department to contribute to the general economic debate, and to discussions related to the financial system, the insurance industry and the prudential regulation framework.

To this end, MAPFRE Economics concentrates its work in three areas: economic and financial analysis, by monitoring the main macroeconomic and financial variables, with special emphasis on their impact on the insurance industry; industry studies, including research on insurance, reinsurance and additional social protection topics; and financial regulation analysis.

You can read the full Outlook report here.

Click here to view the interactive chart on the institution’s response to the COVID-19 crisis and impacts on forecasted growth