The downturn in the global economy worsened in the first quarter of the year, forcing MAPFRE Economic Research to lower the forecast for growth in a large number of the world’s leading economies in 2019.
There are three factors that have led to the worsening of the economic downturn since the second half of last year: the Eurozone is still losing economic dynamism, which is especially troubling given the situation of debt and lack of room for public stimulus policies; China’s economic growth suffered due to the economic and financial normalization measures put in place in 2018; and the protectionist stance of the United States against the rest of the world (especially, but not exclusively, with China) have ended up affecting not only trade, but also investments on a global scale.
Therefore, Economic Research has reduced the forecast for growth for the Eurozone in 2019 by five tenths to 1.2. It specifically highlights the case of Germany, which will grow one point less this year (0.7%) compared to the forecast from just three months ago, while Italy has entered a recession (-0.1% forecast for 2019).
The forecast for Spain maintains an economic growth for 2019 of 2.3% (doubling the Eurozone’s growth rate) and a two tenths decrease in the growth forecast for 2020 (1.9% compared to 2.1% at the end of the year), as the forces that have driven growth these years are tending to become exhausted.
The report highlights that growth continues to be “based strongly on domestic demand, especially in consumption, and will be supported by the creation of jobs, acceleration of salary income, the effects of extending the primary deficit with the pre-election transfers arranged in 2019 and the continued use of credit, although these are forces that will become exhausted in the medium term.”
Global indebtedness increases
Another warning sign included in the report is related to the progressive increase of levels of indebtedness –both public and private– which affects developed and emerging economies alike, though unequally.
This risk, according to Economic Research, takes shape in three ways: the heavy sovereign debt of the developed economies and smaller emerging economies; the emerging corporate leveraging, especially in dollars, in a context of a downward raw materials cycle and a low level of revenue for cash flow in the companies, and the emergence of “corporate structured debt”, which is positioned outside of the banking sector (known as “shadow banking”).
Insurance industry
In the case of the insurance industry, the forecast economic downturn will affect premium growth in global insurance, especially in the Non-Life and Life Risk segments, given their close ties to the behavior of the economic cycle.
On the other hand, this forecast for a downturn and low inflation have led the European Central Bank to a more accommodating stance in statements on monetary policy. The first increase in interest rates is not expected until 2020, and the ECB has not yet made any decision on the normalization of deposit rates, which are still in negative territory. Thus, this environment of low interest rates will continue to harm the development of the Life Savings and Lifetime Income segments on the insurance market.
