Economies around the world and inflation are predicted to improve next year, which will lead central banks like the US Federal Reserve (Fed Reserve) to cut interest rates in 2024, although countries like China might do it sooner, while Japan could increase rates, Swiss Re’s John Zhu explained in a recent interview with Reinsurance News.
The reinsurer’s chief economist for Asia Pacific, said: “There was certainly a degree of surprise in 2023 regarding how strong and resilient some economies were. The US economy particularly, had a very strong labour market, and robust consumer spending. All of these were good, but it also meant that the Fed Reserve needed to raise interest rates.
“For 2024, we have seen interest rate increases over the past 12 months, including the Fed Reserve, ECB, the Bank of England, as well as other central banks, and we expect more to come with the intended economic slowdown. With inflation coming down close enough to 2%, central banks could cut rates as early as next year, although we think it will be at least middle to late 2024 before the Fed Reserve reduces interest rates.”
China, however, seems to be in a cycle of its own, Zhu points out. The country’s economic recovery has been weak, and inflation is low. Over the past months inflation has hovered around zero, even slightly negative. CPI numbers have shown mild deflation, whereas the PPI has been in deflation for several months now, according to the executive.
“While interest rates are likely to be cut, they will not be reduced to zero. One thing we need to monitor is not only when, but the magnitude by which central banks will cut interest rates. We expect that major central banks to be quite cautious, given that inflation has been so high for so long. They don’t want to declare victory and then see inflation re-accelerate,” Zhu explains.
Adding: “We’ve been wanting higher yields, higher interest rates, and I think we’re finally in this new equilibrium, a new regime. With high interest rates, we generally see more positives for all kinds of insurance products,, although there are risks as well. For example, we think there will be reasonably strong demand for protection and risk products overall next year.”
A number of western countries are predicted to cut interest rates next year, but many countries in Asia have started cutting them this year, Zhu highlighted.
He noted: “The big one is of course China; its economic recovery has been relatively slow, having fully reopened recently. Hence, it’s already cutting interest rates.
“Vietnam also reduced its interest rates earlier in March this year. Asia region has had a relatively smooth interest rate profile compared to the very sharp increases in interest rates in the US, Europe and the UK. And I think that demonstrates a pretty good post covid macroeconomic performance with much of emerging Asia.
“Emerging Asian economies generally have grown relatively strongly in terms of GDP and income growth. At the same time they’ve kept inflation relatively muted. We certainly didn’t see the almost-double digit inflation rates like those in some advanced economies.
“That meant that they potentially had room to cut interest rates earlier than the US. Hence again, the outlook divergence also comes in the form of different interest rate paths. Emerging Asian and Latin America economies have managed to keep inflation relatively low and fairly controlled, because of this, they had some room to ease monetary policy slightly earlier to help their real economies.”
The Swiss Re Institute believes that Asian economies can potentially achieve relatively ‘soft landings’, in a way that either they will be able to stop increasing interest rates, or even cut interest rates slightly to help their economies grow.
As a result, the reinsurer has forecast in their sigma report, that there will be significant growth coming from Asia next year, in contrast to the US or China.
While many countries are predicted to cut interest rates in 2024, Japan is going in the opposite direction and will be increasing interest rates.
Zhu stated: “Japan’s economic and interest rate cycles are slightly different. And they are diverging because the BoJ, one of the few to do so, is likely to raise interest rates. But that’s due to the fact that it was starting from negative.
“This may be a genuine regime shift because Japan has gone through so many years of deflation and ultra low interest rates, even yield curve control. If it exits that next year, I think that actually is quite a big deal.
“And potentially, not just for Japan but globally as well, the interest rate rises could also have a spillover effect on global bond markets and global foreign currency markets.”
The re/insurance industry is likely to benefit from this, Zhu notes: “Many insurers would benefit from this, because many are huge buyers and investors in Japanese government bonds. With a higher yield environment and by allowing yields to move more freely, we are quite likely to see at least some periods where yields are higher. And in the medium to long term, it is a positive for insurers.
“This is because re/insurers are such big buyers and investors in government bonds. So high yields are a tailwind for the industry. There is also upside in the currency aspect given that the Japanese yen has been one of the weaker and one of the worst performing currencies this year.
“But next year, with the BoJ potentially going in the opposite direction — although this is not going to be a sudden massive increase — it suggests a narrowing in the interest rate or yield differential between the US and Japan and that again, is likely to support Japanese assets.”
