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Economic and Industry Outlook 2018

  • According to the Annual Outlook Report by MAPFRE Economic Research
  • The global economy will see growth of 3.7 percent this year, developed markets nearly 2 percent and emerging markets 4.9 percent
  • Spain will continue to lead growth in Europe, albeit at a lower rate (2.6 percent)

The global economy could grow by 3.7 percent this year, 0.1 percentage point more than it is expected to register for 2017, and exceeding the predictions from 12 months ago. Since then, the global economy has gained traction across both developed and emerging markets. The year 2018 looks set to see an upturn in the contribution to global growth by developed markets (already above 2 percent) and by emerging markets (around 4.9 percent), the latter led by the resilience of growth in China as well as Brazil and Russia exiting recession.

However, the dynamics of global economic activity are showing signs of stabilization, pointing to a possible change of cycle by the end of 2019. This is one of the main forecasts included in the "Economic and Industry Outlook 2018" prepared by MAPFRE Economic Research and published by Fundación MAPFRE.

As explained by Manuel Aguilera, General Manager of Economic Research, "The year 2018 will be dominated by the cycle change in several developed economies, the potential reversal of the excessive optimism that usually occurs before changes in the economic cycle, and the start of a gradual adjustment of global liquidity."

The world is still caught up in a series of expectations which, in spite of buoyant economic activity, have not yet been borne out by the performance of real indicators. This could turn the continuist view of 2018 into a risk scenario. The catalyst in this case would be the transmission of an increased global liquidity shock due to poor monetary management and the pro-cyclical behavior of global investment portfolios.

The report underscores the risk of a fall in long-term inflation forecasts, with an acute impact in 2018. Inflation will remain contained though focused on central bank targets, while long-term interest rates will rise, with only slight improvements in their term premiums. Economic Research predicts a US official interest rate of around 2 percent by the end of 2018, while the ECB rate will remain at 0 percent.

This is the second annual outlook report that MAPFRE's analysis unit has prepared. The aim of the report is to offer a global view of the economic outlook and forecasts for 2018, both worldwide and in the main economies, and to use this general framework to analyze the environment likely to face the insurance industry.

Spain leading growth in Europe
The forecasts for Spain indicate that the country will continue to lead growth in Europe, though it is unlikely to repeat the success it enjoyed in 2017. The maturity of the cycle and the cost of political turmoil put the predicted growth in 2018 at nearly 2.6 percent (compared with the 3.1 percent it is expected to register for 2017), which nevertheless still exceeds its long-term target. This prediction has an upside risk depending on whether the political mood improves and the structural reforms implemented in the past increase the growth margin. Spain's unemployment rate is now at the structural limit (nearly 16 percent), which, in the absence of reforms, poses challenges for a sustained increase in economic activity.

Global risks
The report identifies certain global risks that could introduce a downward bias to the macroeconomic forecasts for 2018. Some of these risks are related to geopolitics, particularly as regards the growing tension between North Korea and the United States. Coupled with this risk are potential errors in the implementation of the economic policy in the US and China, and at the domestic level, the emerging political cycle could empower populist tendencies that are more reluctant to introduce major structural reforms, which would impair economic growth.

Insurance Industry
With regard to the insurance industry, the global growth predicted for 2018 is likely to have a positive impact on the performance of the market worldwide and on the emerging economies in particular since they will benefit from greater elasticity in the growth of the insurance business in a growth scenario.

However, in the case of the developed countries, lax monetary policies continue to hinder the development of Life insurance related to social protection and savings. Monetary normalization is likely to have a positive impact on these markets but no announcements in this respect have yet been made.

Meanwhile, the natural disasters that occurred in the latter half of 2017 will not only have a profound effect on the combined ratios and profitability of reinsurers, but will also impact insurance rates and renewals of reinsurance contracts, in a market which in the absence of major disasters had become very competitive in terms of prices.

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