Swiss Re is anticipating a softer and diverging global economic growth in 2019, with the overall balance of risks skewed to the downside.
In its latest Economic Insights report, the reinsurance giant states that it is keeping a close watch on the ‘three Ps’: prices, as inflationary pressures are increasing in the medium term; policies, as central banks transition from quantitative easing (QE) to quantitative tightening (QT); and politics, as trade tensions mount.
Regardless, Swiss Re says the environment remains upbeat and one of stronger growth for insurance markets, thanks also to emerging markets powering on.
Over the past two years, global economic growth was the best it has been in a long time. While the outlook is still benign, Swiss Re believes softer and more diverging global growth is ahead and forecasts U.S GDP growth to decline by 0.7% to 2.2% over the next year, on the back of a fading fiscal stimulus, tighter monetary policy and trade tensions.
The firm also expects the Euro area economy to slow somewhat to 1.5%, which is still above its longer-term growth trend.
For the UK, Swiss Re anticipates growth rates to average 1.6%, though this is highly dependent on a benign Brexit outcome.
For emerging markets, where growth projections can vary significantly by country, the report states a belief that GDP growth will rise modestly to 4.9%. China’s GDP growth is predicted to fall to about 6.3%.
In addition, Swiss Re is not overly concerned about consumer price inflation in 2019. Even with a 20% increase in oil prices from current levels, the report estimates U.S and Euro Area headline inflation to remain below their current levels. However, the drivers for medium-term increases in inflation are well in place.
In the U.S, the economy is already at full capacity, the labour market is very tight and wages are increasing, which puts the economy at risk of overheating. In Europe, core inflation (excluding energy prices) has stabilised at around 1% in recent years.
Overall, Swiss Re believes the balance of risk is tilted to the downside with trade tensions being our number one risk to watch.
The company’s baseline scenario already assumes a 25% tariff on all goods traded between the U.S and China and an associated negative impact of 0.1% to 0.2% on global GDP growth.
However, these figures could worsen to about 1.5% to 2.5% if a full-blown trade war occurs, and a 10% tariff rate on all goods traded worldwide is imposed. Trade tensions have also reignited the risk of a sharp slowdown in China’s economy, which would also have a severe impact on the global economy.
Other risks Swiss Re sees are overheating/recession in the U.S, stronger than expected inflationary pressures and a central bank policy error.
The still-favourable economic circumstances support above 3% growth in global insurance premiums over the next few years.
China and emerging Asia are the main engines of growth due to their increasing wealth and insurance penetration.
Marine and trade credit lines would suffer the most if trade tariffs are imposed.
And finally, the increase in interest rates to date will help insurance profitability through higher reinvestment yields in fixed income, albeit very slowly.