It expects the war in Ukraine to have a slightly bigger impact on the Eurozone, where 2.7% growth is expected this year, than on the USA

The experts from Economic Research fail to rule out a recession if the conflict drags on beyond 2022

MAPFRE Economics, the economic research division at MAPFRE, has reflected on how, during the second quarter of 2022, the global economy has continued on its path toward a slowdown in activity and higher rates of inflation. This has resulted in the base scenario forecast for the year being cut from 3.6% to 3%, and an “increase in signs of a possible recession,” according to the “Economic and Industry Outlook: Third Quarter Perspectives” report.

In tracing this somewhat more negative panorama, MAPFRE Economics has pointed to the confluence of events including tension in supply chains, the main component of which is liked to China following the continuation of zero-tolerance policies to fight Covid-19; the subsequent contagion of the global chain of value rendering the recovery of even limited supply incomplete; the geopolitical component dragging out, deepening the food and energy crisis; and central banks tightening their monetary policies in response to an inflationary backdrop with nobody really knowing how long it could last. The factors are starting to drip down into the expectations of agents, with a contraction in real revenue, and they serve as the basis “for certain shortcomings forming part of a structurally higher regime of inflation.”

According to MAPFRE Economic Research, these factors will have a bigger impact on the Eurozone than the USA. In relation to the Eurozone, expected growth in the baseline scenario now stands at 2.7% and 1.8% for 2022 and 2023, respectively (compared to 2.9% and 2.7% as previously forecast). “The conditioning factors remain the region’s high energy dependence and affordability problems, in addition to pressure on prices. This is combined with an unfavorable monetary policy that rebalances aggregated demand and triggers the risk of fragmentation once again, with a negative impact on public spending that is asymmetrical across different countries,” the report suggests.

In the specific case of the Spanish economy, growth expectations have been cut back by one tenth of a percent for 2022, from 4.2% to 4.1%, with expected growth at 2.4% for 2023 (down from 3%) and an average inflation of 8.2% for this year. However, as is generally the case, there is an increased risk of the alternative scenario actually occurring, i.e., should the conflict in Ukraine persist beyond 2022, with an increase in sanctions or cutbacks in supply by Russia, and more persistent inflation with a harsher monetary response. In this case, GDP would dip into the red next year, to -2.5%. “With a view to containing inflation, both the European Union and Spain started to convince social agents (employer associations and trade unions) about the need to make efforts to refrain from increasing salaries at the same rate as inflation. They have increased by 2.5%, meaning that the loss of purchasing power in households is going to be severe,” indicated experts at the Economic Research department.

In the USA, growth expectations have also been revised down, although to a lesser extent than in the Eurozone, to 2.5% and 1.4% in 2022 and 2023 (compared to 3.2% and 1.7% as estimated previously). “The monetary policy response is expected to be more aggressive, and the drive, in the fight against inflation, will reach restrictive levels (compared to the prospect of neutrality in the previous report); as a result, aggregate demand is expected to fall more significantly and the unemployment rate is expected to be more sensitive to the process,” they add.

Finally, in relation to emerging markets, it is expected that China and South-East Asian countries provide “a cushion for global growth, although to a lesser extent that during the process of reopening following the Covid-19 crisis.” In the specific case of Latin America, MAPFRE Economics expects “positive performance,” although with notable differences between export countries, benefiting from the current context of raw materials, and import countries or countries with tacit vulnerabilities, which “could encounter problems funding their current accounts.”

Below are details of the MAPFRE Economics forecast by region and country:

Impact on the insurance industry

The report, as is often the case, includes an analysis of how these forecasts affect the performance of the insurance industry. The experts acknowledge that the tightening of monetary policy will slow down aggregate demand, cooling the economy against a backdrop of higher, longer-lasting inflation than expected, which will wear away the purchasing power of households and business margins. However, and although the backdrop is complex for the insurance sector, given the correlation between its business and the economic outlook, MAPFRE Economics believes that there are business opportunities in the Life Savings business and traditional annuities with interest-rate guarantees, and some lines of business, such as health insurance, may continue to perform positively in light of the saturation of public healthcare systems.

In the specific case of Spain, the expected dynamics are similar. According to MAPFRE Economics, the high rates of inflation (10.2% in June) and its consequences have thrown a dark cloud over the outlook for the insurance business and eroded its profitability, increasing pressure on the price of insurance. In turn, the scarcity of supply continues to drag down the automotive sector, meaning that the automotive insurance business will continue to suffer in the coming months, while the context for the savings-linked Life insurance business and traditional annuities continues to improve on account of the tightening of the ECB’s monetary policy. However, nominal interest rates remain at lower levels than inflation, which is also making life hard trying to market such products.

 

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