US / China trade status a key influencer, as Asia poised to run the global engineExcerpts from the SwissRe Sigma Report: Sustaining Resilience Amid Slowing Growth: Global economic and insurance outlook 2020/21. Read the full report here.
Global growth remains weak and will slow over next two years. Last year marked the peak of the cycle, and our current forecasts for US and euro area growth of 1.6% and 0.9% in 2020, respectively, are below consensus. The largest down revision is to our forecasts for the euro area: the region is at risk of entering a period of low growth, low inflation and low interest rates, so-called “Japanification”.
With lower levels of productivity and technical innovation, and an ageing population, the euro area will do well to weather the state of economic inertia as strongly as Japan has done since the 2000s. Overall, Asia will remain the engine of global growth, in particular its emerging economies: we forecast near 6% growth in India and China in 2020.
This year’s weakening growth came as trade tensions and geopolitical polarisation increased and, with low growth and low inflation, a U-turn in monetary policy back to easing mode. US/China trade tensions and escalation of these more broadly are the biggest risk to global growth. The risk of US recession remains elevated, but a US-led global downturn is not our baseline scenario, and the US economy remains the most resilient of the G4 nations. If there is recession, we believe it will be more moderate than that after the global financial crisis of 2008/09.
Globally, low and even negative interest rates are set to stay. We expect one more US interest rate cut in the first quarter of 2020. In our view, current unconventional monetary policy and negative interest rates do more harm than good, with adverse effects on the real economy and functioning of financial markets. The world economy has become less resilient, and with monetary policy options all but exhausted, a different policy mix is needed to build resilience in the next 10 years. Less central bank action, more supply-side reforms to lift productivity, and more fiscal stimulus for growth-enhancing areas like infrastructure and sustainable investments.
Insurance is a key contributor to economic resilience, even more so when growth slows: when households and businesses can access financial compensation for loss events, the underlying capacity of an economy to absorb shocks is enhanced. Encouragingly, the global insurance sector continues to grow at trend. Similar to last year’s two-year view, we forecast non-life and life premiums to increase by around 3% in both 2020 and 2021. Pricing in non-life has strengthened, driven by rising loss costs in property catastrophe and US casualty, and we expect this to continue. Low interest rates will continue to pressure insurers to drive technical profitability, particularly in long-tail lines.
Economic and Inflation Outlook
Global growth is slowing from an already low base. The negative impact of increased uncertainty emanating from trade and geopolitical tensions, and Brexit, has hit business sentiment in manufacturing. The IMF estimates that by 2020, the US-China trade dispute – even without further escalation – will have hit global output by 0.8%, with much of the impact resulting from increased uncertainty. This has manifested most notably in a significant weakening in global capital spending from a 2018 peak, which bodes ill for future output. Similarly, the global Purchasing Managers’ Index (PMI), a leading manufacturing sector performance indicator, has dropped into contractionary territory this year, indicating that world manufacturing output is set to fall. In Germany, the industrial sector downturn has deepened, and the economy is likely to be the first among the G7 countries to be classed as already in “technical recession”.
On a positive note, the global services sector has held up well so far, with tight labour markets and solid wage growth supporting consumption. Moreover, central banks have reacted with further easing, and some fiscal easing should help extend the current growth cycle to avoid a global recession. In particular, the Chinese authorities’ shift towards more expansionary policies should cushion the global slowdown (see Headwinds from credit impulse fading gradually). However, the risk of industrial sector weakness spreading into the rest of the global economy has increased. First evidence has come from a weakening in services PMIs over the summer, albeit these remain in positive territory in most economies. Overall, we see the risk of a US recession in 2020 as elevated at 35%, though this is unchanged from our view at the beginning of the year. While we predict lacklustre growth this and in the coming years, we do not anticipate an outright economic recession.
Interest Rate Outlook
Central banks (CBs) have made a sharp U-turn in monetary policy this year. The major CBs had embarked on a gradual tightening path in 2018, but they are now firmly back in easing mode amid slowing growth, moderate inflation and increased downside risks. The US Federal Reserve (Fed) has already cut rates three times this year, and we expect another cut in early 2020. The Fed will also publish the results of its year-long review of the monetary policy framework, tools and communications in the first half of 2020. We do not expect a significant change to the current framework, though policymakers are likely to increase the flexibility of the current regime with some tweaking around the edges.
Bounce back in China to continue to drive global life premiums
Based on part-year data, we estimate that global life insurance premiums will grow by around 2% in real terms in 2019, slightly less than the average annual rate of the last five years. Real premiums in the advanced markets will stagnate (+0.5%), while emerging market premium growth will again be strong (up around 9%) after exceptionally weak growth in 2018 due to tighter regulation on asset management in China. Our outlook for 2020/21 is that global life premiums will grow by around 3% per year, mainly driven by continued strong growth in the emerging (+9%) and a slightly improved situation in the advanced markets (+1.5%).
Early indicators from the advanced markets suggest that premium growth in 2019 will only be positive in North America (+2%), with real premium income in EMEA and Asia-Pacific remaining at 2018 levels. Our outlook sees average annual growth of around 2% in North America in the coming two years, and somewhat weaker growth in advanced markets from EMEA and Asia-Pacific. China remains the main driver of life premium income from the emerging markets, and developments there continue to have large impact on the emerging markets aggregate. We estimate that premium growth in China will accelerate strongly to 13% in 2019. Our 2020/21 outlook forecasts average annual emerging market premium growth of around 9% (11% in China and 6% in the other markets).
Read the full report: Sustaining Resilience Amid Slowing Growth: Global economic and insurance outlook 2020/21 here.