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INSURANCE| 22.07.2021

MAPFRE Economics keeps the growth forecast for the global economy at 6% and considers the rebound in inflation “temporary”

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Despite the improved evolution of the pandemic, its estimate has not changed due to the uncertainty of emerging countries. Inflation could be at an average of 3.5% this year, an acceleration that cannot be compared with the last decade.

MAPFRE Economics has updated its forecasts for the global economy. Although more optimistic, it keeps its outlook for this year and the next unchanged — forecasting growth rates of 6% and 4.4%, respectively, in the baseline scenario because of continuing uncertainty about emerging economies, where strong restrictions on mobility and social contact are still in place. “A strong rebound in global growth is expected as China recovers momentum and advanced economies benefit from the easing of restrictions and hence the liberalization of household demand. In emerging markets, growth will slow but is expected to improve in the second half, as a result of rising numbers of infections,” states the report “2021 Economic and industry outlook: third quarter perspectives.”

With regard to market movements and changes in the economic picture that have taken place in recent months, the economic outlook in the United States is noteworthy, where improved health conditions, a rebound in employment and the generous fiscal stimulus, among other factors, will contribute to significantly boosting the economy. In fact, it has maintained the growth forecast for this year at 6.6%, but has improved it from 3.3% to 4.5% for 2022. In addition, the systematic creation of one million job positions is expected during the summer months, returning unemployment to near 2019 levels for the beginning of 2022.

There is also improvement for the eurozone as a whole, although there is a degree of uncertainty around the growth projections, mainly linked to tourism and leisure activities, consumer behavior, and the role of exports and private investment. In this context, which is showing signs of improvement, the GDP growth forecast has been raised to 4.5% (from 4.0%) for 2021 and to 4.5% (from 4.1%) for 2022. Risks in the eurozone at the sovereign economic and financial level appear to be under control as a result of ample liquidity, low interest rates, ECB support and government stimulus programs. The major unknown element is how the withdrawal of support for temporarily unemployed persons will be implemented and what effects this will have on companies. NGEU funds will begin to be deployed soon and are expected to be a major support, but they will go toward investments in the “environmental transition” and “digital” spheres rather than supporting business affected by the crisis. “It is worth remembering that the pandemic may seem to be subsiding now, but it is not over, so the main risk is of new waves returning, like in the United Kingdom, or of vaccines not being effective against new variants of the virus,” say the economists.

Where Spain is concerned, the same vein is repeated. MAPFRE Economics estimates GDP growth of 6%, the same as in the previous quarter, but has improved that from 5% to 6% for 2022. “With the progress of vaccination, which was close to 50% of the population at the end of June (with 99.7 doses administered per 100 inhabitants), there is a perception that the epidemic is beginning to be controlled,” say the experts.

In emerging markets outside China, GDP growth is likely to slow in the second quarter of the year due to the rise in COVID-19 cases, especially in India. However, growth should begin to improve in the second half of the year. At the same time, lower growth and rallies in risk aversion could impact a new phase of currency weakness, but one that is more mild thanks to its balance-of-payments adjustment in 2019 and 2020. There is no doubt that the strong global economic recovery will boost industry in emerging markets and their export prospects, in line with recent PMI readings, and that raw materials producers will benefit from rebounding prices. However, “supply shortages and shipment delays could slow down the industrial momentum in the coming months and production prices could face further upward pressure. Moreover, with rising inflationary pressures almost everywhere and compensation for wide production gaps, more central banks are becoming aggressive. In addition to Brazil, Mexico and Russia, where higher interest rates were expected by the end of 2021, Colombia and some Central and Eastern European countries are also expected to tighten their monetary policies,” explained MAPFRE Economics.

 

Inflation behavior

The improvement in the longer-term forecasts for the world economy is accompanied by a rebound in prices. In this sense, and to reflect the strengthening of recovery, supply bottlenecks and rising cost pressures, inflation forecasts are at an average of 3.5% this year, an acceleration that cannot be compared with the last decade. However, this trend is still expected to be temporary and, in most economies, the current rise in inflation is in response to temporary supply and demand dynamics, and will begin to shift as we approach 2022.

In the specific case of the United States, there has been a rebound with somewhat of a lag in 2021, which will last into 2022, “although we have ruled out a change in the inflation regime and believe that the Federal Reserve will be comfortable with rates above 2% for some time, as interpreted from the review of their mandate a few months ago (now imitated by the ECB),” points out MAPFRE Economics. As for the eurozone, although inflation recently rose to 2%, this was due to rising energy prices while underlying price pressures remained moderate, with core inflation at 0.9%. “Inflation in the eurozone could reach 2.5% in the second half, driven by price increases in hospitality, supply bottlenecks and base effects,” they add.

Impact on the insurance industry

As is customary, the report includes the way in which these economic forecasts affect the performance of the insurance industry. Insurance markets have been resilient during the crisis, with the Life segment having the biggest declines almost across the board, along with some Non-Life segments like automobiles (partially offset by the positive performance of health insurance), but there are already signs of recovery.