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ECONOMY| 27.10.2021

MAPFRE Economics thinks stagflation is unlikely but lowers its growth forecast 

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It has cut 0.3% from its forecast for Spain’s economy this year, now predicting 5.7% growth with 2.7% average inflation. It sees rising prices as a persistent but not permanent phenomenon, and one that will not alter the policies of central banks. It acknowledges an environment of growing global concerns about consumer prices, especially in emerging economies.

MAPFRE Economics, which is MAPFRE’s economic research service, has scaled back its growth forecasts for the world economy, down to an estimate of 5.9% for this year. This is taking place in a context of growing concerns about consumer prices worldwide, but especially in countries with emerging economies. As these experts explained in their report entitled “2021 Economic and Industry Outlook: Third quarter forecasts”, the global crisis has produced a series of shocks that are affecting the economy more strongly than expected: supply disruptions derived from the damage COVID‑19 has caused to global value chains, especially in industries producing components; acceleration of the resulting inflation, combined with a rebound in global demand and limitations on energy; and an economic slowdown in China.

In the case of Spain, the forecast for this year has been downgraded by three decimal points, from 6.0% to 5.7%, while their forecast for the coming year has been increased from 6.0% to 6.2%. This more optimistic outlook for 2022 is due to “the launch of projects associated with the Next Generation EU (NGEU) program, which will enhance recovery of economic activity,” economists explain. They believe that the risks faced during upcoming quarters have increased, “especially the risk of inflation (they expect the year to end with an average CPI of 2.7%), caused by higher energy costs resulting from the rise in prices for natural gas, electricity and other fuels.”

For the eurozone, MAPFRE Economics has increased its growth forecast for this year by 0.5%, arriving at 5.0%, based on the improved performance recorded during the second and third quarters. However, their forecast for the upcoming year has been downgraded by two decimal points to 4.3%. “With the high vaccination rates seen in Europe, we believe that social restrictions will continue to be rolled back, and we expect that deployment of NGEU funds will have a long-lasting multiplier effect on the economy, by producing structural reforms and investment in infrastructure,” they explain.

On the other side of the Atlantic, the U.S. economy will experience a slight slowdown caused by the stresses experienced in the supply chain. “Transportation bottlenecks are the greatest point of tension, but the limited excess capacity of domestic production, low inventory levels, sharp increases in the cost of goods (most notably in the case of raw materials), all added to employment challenges, are making it increasingly difficult for supply to keep up with the pace of demand,” they add. All of this is leading experts to lower their forecast for this year by eight decimal points, from 6.6% to 5.8%, and by two points for 2022, from 4.5% to 4.3%.

The greatest level of uncertainty, however, is coming from China. For the time being, the MAPFRE research service has lowered its predictions for 2021 by 4 decimal points to 8.0%, and by three decimal points for 2022, to 5.4%. However, all of this depends on how quickly “investment slows in the real estate and construction sector, since it represents about 20% of China’s GDP (with all of the ensuing ramifications for employment, construction materials, transportation, energy, and banking).” In the opinion of the experts, a 10% slowdown in that area would cause growth to fall by 2 percentage points. “It can be expected that under the current conditions, financing terms will become more restrictive for developers in general. There is no doubt that Evergrande will get bailed out, because its size affects the whole system,” they point out.


Inflation will be persistent, not permanent

“Inflation will be persistent, but not permanent,” the report from MAPFRE Economics states. “Although [this inflation] is transitory, it will take longer to diminish than everyone was expecting a year ago. However, this will not alter the ‘forward guidance’ of the global central banks, and therefore, we are not going to see a monetary shakeup like the ‘taper tantrum’ of 2013 or the ECB’s easing of monetary policy in 2011,” they say.

The effects of inflation on disposable income, and therefore on consumption, will be partially offset by the savings freed up “thanks to the generalized improvement seen in post‑COVID expectations and removal of restrictions.”

Even in its most pessimistic scenario, MAPFRE’s research service rejects the idea that the economy is heading towards a scenario of economic stagnation while prices continue to rise, or in other words, what is known as stagflation.


Impact on the insurance industry

As it always does, the report includes discussion on how these economic forecasts would affect the performance of the insurance industry. Outlooks on the insurance markets at the worldwide level continue to follow a clear upward trend, in line with the expectations for an economic recovery that will take global GDP above the level it had before the pandemic. This is supported by strong growth in the USA and in Asian countries with developing and emerging economies. Ostensibly, the predictions for Latin America are improving as well, given the strong performance shown by the region’s largest economies, and this is having favorable repercussions on the primary markets for its insurance industry. However, many economies will have to wait until 2022 before regaining the levels they were experiencing before the crisis, which means that their insurance markets could show an uneven recovery, and one that takes longer to emerge.

In Spain, the insurance industry continues to show significant growth, for both life and non‑life products. However, for life insurance the basic effects of the pandemic are still quite notable, with pre‑crisis figures still seeming a long way off. Equities are beginning to be seen as an alternative form of protection against an environment of low interest rates and rising inflation, and this is encouraging development of life insurance products where the policyholder assumes the investment risk. Products of this type are gaining importance, with a wide range of offerings now being launched onto the market. For the non‑life segment, the levels seen before the crisis were never lost, and it is now showing significant year-on-year growth as economic recovery continues (except for some specific lines of business).

To read the full report, click here (Spanish version)

To access the interactive versions of the charts in the report, click here (Spanish version)

In the following videos, Ricardo González, Director of Analysis, Sectorial Research and Regulation, and Gonzalo de Cadenas-Santiago, Director of Macroeconomics and Financial Analysis at MAPFRE Economics, summarize the industry and macroeconomic elements of the report.