• The global economy will grow by 3.3 percent this year, developed markets below 2 percent and emerging markets between 4 percent and 5 percent

  • The risk scenario contemplates a disorderly adjustment, catalyzed by a monetary policy error in the USA

  • Spain will grow by 2.3 percent, three tenths less than in 2018

The world economy could grow by 3.3 percent this year, three tenths less than what was expected to be recorded for 2018. The year will be marked by a slowdown in the global economy, an adjustment that will nevertheless be smooth and orderly. This is one of the main forecasts included in the 2019 Economic and Industry Outlook report prepared by MAPFRE Economic Research and published by Fundación MAPFRE.

The closing of 2018 clearly marks the beginning of the “path of gradual slowdown” that we have been anticipating since the end of 2017, according to the Director of Economic and Financial Research at MAPFRE Economic Research, Gonzalo de Cadenas-Santiago. In 2019, a fall in the contribution to global growth from developed markets (which will grow at below 2 percent) and a greater contribution from emerging markets (which will see growth of between 4 and 5 percent) is expected, supported by foreseeably better global financial conditions.

Among the symptoms of slowdown detected by the report, the reduction in the temporary premium in the yield curves of developed countries, challenges faced by the financial accounts and balance sheets of corporate sector actors, high levels of public sector indebtedness in the developed world, excessively priced assets or distortions in global economic governance all stand out.

“The cyclical slowdown is a fact,” explains De Cadenas-Santiago; “the development of global economic indicators, the stock market correction experienced since the middle of the year, the fall in corporate profits and -in particular- the global correction of trade flows and Foreign Direct Investment account for this. They are all symptoms of change, already palpable in trade, investment and global expectations.”

Slowdown or recession?

The core question of this report seeks to discern whether we are facing a smooth international cycle of change that can be managed under current economic policy and which ultimately facilitates correcting the imbalances generated by the global pro-cyclical economic policy of the past five years, or whether, on the contrary, we are facing the gestation process of a new global crisis resulting from these imbalances. MAPFRE Economic Research leans toward the first option in its forecast.

Risk scenario

But not only do the latent risks reported a year ago continue; in some cases, they have become more likely. Although the immediate focus on the dangers of global economic governance revolves around the trade war and its effects on activity, the greatest risk identified by the report is related to the pressure that institutions may be subject to for a political or market agenda.

The most significant case is the pressure exerted on the Federal Reserve. A monetary policy error in the United States, in the face of a possible upturn in volatility or the price of oil, could trigger the alternative risk scenario. A steady rise in US rates to 3.50-3.75 percent, a sharp increase in global risk aversion, and a 10 percent drop in the stock market coinciding with the moment of greatest volatility would constitute elements to consider as part of the risk scenario.

Spain is also seeing a slowdown in growth

The forecasts for Spain point to economic growth of 2.3 percent in 2019, which is a slowdown of three-tenths compared to the expected increase for 2018. The lower growth comes on the back of a slowdown in domestic demand, which looks set to fall from 3.2 percent to 2.5 percent. The external sector will only compensate minimally for this fall.

The lower contribution of domestic demand will be due to a base effect in the first quarter of 2019 that will compensate for the sharp upturn in the same period of the previous year, and a lower contribution of investment due to poorer financial conditions and an adjustment of expectations for the coming years.

Insurance industry

As far as the insurance industry goes, the expected economic slowdown will translate into growth of global insurance premiums, especially in the Non-Life and Life risk segments, given their strong link to the behavior of the economic cycle. In Spain, MAPFRE Economic Research expects nominal insurance premiums in the Non-Life segment to grow by around 4.1 percent in 2019.

As for Life savings and traditional annuity insurance, the low interest rate outlook persists and will continue to hamper the business. Among the risks that may affect the Spanish economy and the behavior of the insurance industry are the possibility of an increase in risk premiums, either because of contagion from other peripheral countries or because of its own economic policy decisions that increase uncertainty about the sustainability of the public accounts.

 

The full report is currently available in Spanish and will soon be in English