• In its baseline scenario, MAPFRE Economics predicts that the economy will recover the GDP lost during the crisis by the end of 2022

• It warns of record levels of sovereign and corporate debt in both emerging and developed markets


MAPFRE Economics is anticipating a gloomier scenario for the world economy than three months ago, although it also welcomes signs of revival in the major economies, particularly in China. As detailed in the update to its “Economic and Industry Outlook 2020” report, published by Fundación MAPFRE, based on national accounting data for the first quarter and data on industrial production, retail sales and global trade for April and May, we can take it as read that the contraction of world GDP will be sharper than expected.

As in the previous quarter, and given the continued uncertainty, a baseline scenario is considered in order to draw up their projections. The scenario predicts a recession of 4.9 percent in 2020, followed by a relatively swift upturn of 5.4 percent next year, which will allow the GDP lost to be recovered by the end of 2022. A stressed scenario is also taken into account, in which the recovery is interrupted by a new outbreak and the depletion of fiscal measures. In this case, the recession would worsen to 5.7 percent and continue the following year (-2.2 percent). “Right now, the question is whether the global economy has indeed bottomed out in the second quarter and whether now, thanks to the implementation of fiscal and monetary policy measures, we are entering a gradual phase of normalization that will bring growth back to positive territory at the beginning of next year (baseline scenario),” the economists explain.

The report also includes a list of catalysts that could turn the current global recession into a depression, with longer-term effects. For example, it highlights record levels of sovereign and corporate debt in both emerging and developed markets, “which imply weaknesses that could turn the current liquidity crisis into a solvency crisis.” Among emerging markets, high dollar leverage could push financing needs to levels that may become unsustainable if the crisis is prolonged, leading to selective defaults and market contractions, with effects on the current account (as with the crisis in Brazil in the 1980s or that of Mexico in the 1990s). And in developed markets, the increase in sovereign debt could push fiscal sustainability to the limit and shine a light on the vulnerability of the US and some European countries due to the corporate debt segment of so-called Collateralized Debt Obligations (CDOs).

For the eurozone as a whole, economists at MAPFRE Economics predict a contraction of between 10 percent and 11.1 percent this year. “The risks for the eurozone’s economy entail a deeper and longer-lasting recession, as this crisis will leave scars in terms of both the employment level and companies going bankrupt,” they say. And they do not believe that supply and demand will return to pre-pandemic levels (those of 2019) until 2022. “All EU countries will end up with higher deficits and debt, with the private sector also more indebted, so careful management will be needed to avoid solvency problems in countries and in the financial sector,” they warn. “Economies cannot afford another total shutdown,” they add.

The fall in GDP in the US could range from 8 percent to 9.4 percent (stressed baseline scenario), although it warns that the projections are conditional on there being no resurgence of the pandemic, in which case a further review would be necessary. And, as the economists recall, “the pandemic will not be brought under control and apparently will not abate so long as there are no effective medicines or vaccines.” The closures have led to a historic rise in unemployment of more than 20 million people, and many businesses will close for good. “These insolvencies will result in increased financial defaults, while the higher unemployment level will also have implications on the volume of consumer credit and its default, as well as in the real estate market.” And, as in the rest of the world, they are concerned about debt and estimate a fiscal deficit of 15 percent for the federal government.

China’s estimates have improved from the 0.6 percent contraction they expected three months ago to 0.8 percent growth in the main scenario, owing to a faster-than-expected recovery. However, in MAPFRE Economics’ opinion, uncertainties remain regarding consumption and investment. In addition, there are risks of re-escalated tensions between China and the United States that could trigger geopolitical concerns.

With regard to the Spanish economy specifically, MAPFRE Economics has considerably reduced its range of estimates, forecasting a drop of between 12.1 percent and 13.1 percent this year. It also states that it is no longer ruling out the possibility of a continued recession in the coming fiscal year in a stressed scenario, with a contraction of 1.2 percent. In fact, as the experts from MAPFRE Economics point out, “the risks for the economy are now focused on the level of recovery of business activity,” mainly because the return to normality is taking place gradually, affecting mainly tourism and leisure. All of this has implications for prospects in the labor market. As stated in their analysis, it remains to be seen what percentage of workers affected by ERTEs (Expediente de Regulación Temporal de Empleo — temporary layoffs) will be able to return to their jobs. “In the Spanish economy, tourism and the hotel and catering industry carry significant weight, and it will probably take time for these sectors to return to their previous level of activity, with the subsequent impact on employment.” This leads them to forecast an unemployment rate of 17.2 percent this year, but which could exceed 20 percent in 2021.

Meanwhile, in the emerging world, more volatile investment flows are once again, at least partially, covering the financing needs of emerging Latin American and European countries, which will gradually lead to stabilizing their currencies. This readjustment of capital flows is unlikely to lead these economies back to their pre-COVID-19 situation. The closing balance will be influenced by each country’s macroeconomic fundamentals and, to a large extent, the degree to which the pandemic has affected their economic structure. For example, in Mexico, the MAPFRE Economics team expects a drop in GDP of at least 10.5 percent. “The Mexican economy faces a risk that may well be greater than other countries, as its fiscal revenues depend largely on oil revenues, and it has little room for fiscal stimuli. Furthermore, if it fails to sustain fiscal revenues and/or substantially increase its debt level, the rating agencies could remove the ‘investment grade’ status that it currently holds,” they say. In Brazil, the drop will be at least 8.9 percent this year. The economists also point to the risk of political instability, due to the lack of consensus between the President and state governors and other politicians on how best to deal with the pandemic. “There is also a high risk that the pandemic will get out of control, as infections are still trending upward. When this unprecedented situation comes to an end, Brazil will have to resume its agenda of structural reforms that are still pending,” the economists explain.


Impact on the insurance industry

In the report, MAPFRE Economics provides an updated analysis of the worst economic crises encountered in the last 40 years (since 1980) in order to determine the consequences for the insurance industry, both in the overall business and in the Non-Life and Life segments. According to experts, this analysis confirms that, in general, sharp falls in premiums can be expected in the insurance business at the aggregate level. However, once economic recovery is underway, insurance premiums tend to experience growth above GDP, especially in emerging markets.