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ECONOMY| 12.01.2023

MAPFRE Economics reduces its global growth forecast from 2.7% to 2% for 2023

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Weakening economic activity confirms onset of period of global stagflation. Eurozone will face severe contraction in the first quarter of 2023, with a sharp drop in industry. MAPFRE Economic Research estimates that 2023 may bring new opportunities for the insurance sector.

MAPFRE Economics, MAPFRE’s research arm, expects global growth to slow in 2023, to 2%, seven tenths of a percentage point lower than the forecast in October of last year. The slowdown confirms, according to experts, the onset of a period of global stagflation characterized by weak economic growth and inflationary pressures that remain high, which will last at least until 2024, when GDP growth will rise to 2.7%. A reconfiguration of risk factors is expected, in which the lack of supply due to disruptions in supply chains will be replaced by a less dynamic labor market and a contraction in demand as a consequence of rising interest rates.

The 2023 Economic and Industry Outlook predicts that the eurozone will suffer an economic contraction in 2023, starting from the first quarter. It is feared that European industry will fall into decline if the energy crisis cannot be resolved, as investors may turn to countries with cheaper energy. In addition, there is a risk that the economic contraction will be exacerbated by the monetary stance of the European Central Bank (ECB). These problems mean that, on an annual basis for 2023, the growth forecast for the region is -0.1%, down from 0.0% in the previous report. The hardest hit country in the region will be Germany, with a year-on-year contraction of -0.9% due to a slowdown in consumption, lower industrial production, and a slump in exports.

Spain will be one of the few European economies to be spared the recession despite a small contraction in the early months of the year. Experts believe that GDP will come to 1.0% in 2023, four tenths of a percentage point higher than the forecast in October 2022. According to Gonzalo de Cadenas-Santiago, Director of Macroeconomics and Financial Analysis at MAPFRE Economics, the improvement is due to the tax incentives that have been provided and the still acceptable financial costs. Also, an upturn of 2.1% is expected for 2024. Despite these projections, the outlook is for the ECB to continue tightening monetary policy, which could lead to a downturn in consumption due to a loss of purchasing power and a contraction in credit.

While Europe faces bleak prospects, Asia looks set to contribute to global growth. China is expected to return to a somewhat higher growth rate in 2023 (4.8%) now that the zero-Covid policy has ended. Indonesia and Japan will also grow this year by 4.5% and 1.1%, respectively. Beyond this region, the United States will also avoid a contraction of its economy, with its GDP rebounding by 0.1%. However, this will depend on how investment, the real estate market, and the labor market react to more expensive financial conditions. De Cadenas-Santiago believes that the US economy faces two latent risks: a recession triggered by tightening financial conditions and a liquidity crisis in the markets similar to the “repo” crisis of 2019, when the Federal Reserve was forced to act.

Impact on the insurance industry

As usual, the report includes an analysis of how the economic environment will affect the performance of the insurance industry. MAPFRE experts believe that the market will face greater difficulties in 2023 for business development, particularly in emerging countries, after a year in which the Non-Life sector saw significant growth. The tightening of monetary policy with higher interest rates will continue to boost the savings-linked life insurance business, at least partially offsetting the negative effect of the economic downturn on the insurance business.

In particular, it is estimated that 2023 may bring new opportunities in financial investments in the sector as the year progresses. According to Ricardo González, Director of Analysis, Sectorial Research, and Regulation at MAPFRE Economics, the negative effect on the balance sheets of insurance companies due to the rise in bond rates and the performance of equities has been absorbed by the high solvency levels of the insurance industry, and the environment for life insurance savings business and traditional annuities with interest rate guarantees continues to improve. Also improving is the outlook for the future profitability of investment portfolios, which is used by the insurance industry to supplement its technical profitability, bearing in mind insurance companies’ advantageous position in terms of high liquidity and low leverage owing to the characteristics of their business model.