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ECONOMY| 24.01.2022

MAPFRE Economics forecasts 4.8% growth in the global economy this year due to the effects of inflation 

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It acknowledges an environment of growing global concerns about consumer prices, especially in emerging economies. 

The Economic Research department weighs growing risks in the political economy, governance, and geopolitics.

MAPFRE Economics, MAPFRE’s Economic Research department, warns that the second half of 2021 saw less intense growth rates that will continue during the current fiscal year. Factors such as price pressures on commodities and energy costs congested demand for consumer goods to the detriment of services and led to severe bottlenecks. Furthermore, renewed uncertainty over Covid-19 will continue to set the tone for activity in 2022.  “Despite the risks of growing inflation and diminishing activity, the recovery will continue, albeit at a slower pace and with divergences between developed and emerging economies, as a result of both inherent vulnerabilities and structural factors such as energy dependence, interconnectedness with global supply chains, and the economic importance of the services sector,” explained the experts in the report Economic and Sector Outlook 2022

Moreover, the persistent high inflation is beginning to influence monetary and fiscal policy decisions, where we have seen a more accelerated response in emerging countries. This tightening of the monetary policy (accompanied by debt servicing that is sensitive to the backdrop of lower asset purchases and higher interest rates) exacerbates fears of unsustainability and a return to austerity measures that will hinder economic performance. Elsewhere, the experts point to another global risk that has increased in recent months: global governance and the geopolitical crisis caused by the disorderly exit from Afghanistan, mired relations with China in geopolitical and technological matters, and the recent diplomatic challenge that has opened up with Russia. All this has led the experts to temper their forecasts for the world economy by one tenth of a percent, from 4.9% to 4.8% for this year in the baseline scenario, while they predict an increase of 3.6% for 2023. 

For the eurozone as a whole, MAPFRE Economics predicts growth of 3.9% for 2022 (down from 4.3% in the previous report) and 2.7% for 2023. Inflation in the region reached 5.0% in December, with core inflation remaining at 2.6%. “Inflation is expected to soften in the coming months as energy prices fall, but with OPEC unwilling to expand production in a meaningful way and the European energy mix lacking quick fixes, the decline is likely to be slow,” economists explain. In their opinion, the risks for the region increase with the spike in prices. “Producer prices are under stress, and it is going to be difficult for these not to be passed on to consumers. Meanwhile, supply issues in the automotive and electronics industries should be resolved in the coming quarters. The implementation of further travel restrictions due to the new wave of infections will not play favorably for the recovery of tourism and services. The proper and timely use of European recovery funds, together with structural reforms, continue to be crucial to meeting expected growth rates,” they added. 

Regarding Spain, these factors are having a notable impact due to the importance of the automotive sector on GDP, when vehicle production is at half its pre-crisis level, or tourism, which has only partially recovered and also remains at half its usual levels. MAPFRE Economics expects growth of 5.5% for 2022, compared to the 6.2% it forecasted in the previous quarter (the report is updated every quarter) and that this slowdown will continue over the following year when it expects the economy to grow by 4.3%. 

While these factors do not vary much in the United States, the experts underscored the role of monetary policy following the Fed’s decision to accelerate the withdrawal of stimuli. It is precisely due to this change in the outlook for interest rates, along with rising energy and commodity costs, that MAPFRE Economics has significantly lowered its estimates for the world’s largest economy: 4% in 2022 and 2.5% in 2023, compared to 5.7% and 4.4%, respectively, in previous forecasts. “The labor market is strong, but energy prices remain under stress, and inflation will become persistent, even if it comes down due to a base effect in 2022. The experts anticipate official interest rate hikes, which will impact the financial conditions of companies and households. On the positive side, the $1 trillion infrastructure plan will be a major driver of economic activity in the US,” they noted.

Impact on the insurance industry

As it always does, the report includes a discussion on how these economic forecasts would affect the performance of the insurance industry. Despite the slowdown in global growth, the experts at MAPFRE Economics believe that the increased sensitivity to risk felt by economic players as a result of the pandemic is an additional stimulus to insurance demand. This reality continues to paint a positive picture in 2022 for the insurance business. “The negative effects of the economic reopening on the loss ratio of some insurance lines, such as auto, life, or health, tend toward correction, so the outlook for the profitability of insurance companies continues to be favorable, despite the effect that the rebound in inflation may have in the short term,” they added.

To read the full report (available in Spanish), click here