José Luis Jiménez, Deputy Chief Financial Officer (CFO) of MAPFRE, opened the XXIX International Global Risks Seminar held by the company with some relevant and necessary context for undertaking any debate in the sector: the current economic outlook.
Before the presentation, Jiménez acknowledged that conducting any analysis and, especially, making any forecast is complex given the global uncertainty that sets the tone for socioeconomic developments, although he did warn that the prospects are not particularly promising. “The International Monetary Fund estimates that over the next five years, the average growth of the global economy will be around 3.1, which is the lowest growth we have had in many decades”, he said. This overall calculation comes from a slight improvement in developed countries and a decline in growth rates in emerging regions.
Today, the scenario in these developing economies is very different. “We are struck by the fact that in Asia Pacific and Latin America, we are seeing very strong growth, where inflation is relatively controlled compared with its historical averages, and with very high interest rates that help them control it while defending their currencies”, he explains.
Rising interest rates
Despite the European Central Bank (ECB) lowering interest rates in Spain on June 6, the MAPFRE manager said that globally they will remain high longer than expected, as central banks “were wrong to raise them and don’t want to be wrong again when lowering them”. In Europe, they are going to fall more than in the US due to that difference in activity rates, and the Euro will remain weaker compared with other currencies. But what consequences will this trend have?
- Continued decrease in credit: An investment-related variable. Companies will apply for fewer credits, which “drains” the economic activity of companies, these being ultimately responsible for creating employment and, therefore, well-being.
- Impact on the real estate market, where the price of real estate usually has an inverse relationship to interest rates: when one goes up, the other goes down.
Is there room for opportunities?
With this spirit of prudence, the expert recognized that we are currently in an uncertain environment, despite economists’ efforts. “The most powerful econometric model available is that of the International Monetary Fund (IMF), with more than 500 variables, and it has never been able to predict any crisis”, he said. Despite this, there are assumptions that are easier to trust:
- Geopolitical risks. These are being talked about more and more, especially since the invasion of Ukraine, when there was a structural change in the global economy that altered the situation of perfect globalization. “We bought and sold goods and services anywhere in the world, there were no barriers. The current trend is that we are going toward a world of blocks such as the United States, China and the European Union”, he says, adding that it will be very difficult to leave this path, as a general climate of “great distrust” has been created.
- Persistent interest rates. In the face of this global uncertainty, “central banks are going to have a very difficult role”. Any geopolitical distortion will have a direct impact on industries as essential as food or energy, which would create “another expansionary wave in inflation”. Despite governments trying to contain it for the good of their citizens, independent banks will define the interest rate curve.
Financial stress. “Markets are experiencing a boom that is very difficult to rationalize”, he said. Potential adverse shocks to the economy are rising oil prices, falling stock exchanges and rising risk premiums. “If any or all of these things were to happen, central banks would have to act in an environment of greater weakness compared to previous times”, recalling that during the pandemic, it was possible to act with “a certain fiscal margin to be able to pull up public deficits”, something that would not be possible today.- Climate change and natural disasters. With the setting out of the series from the 1960s to 2021, there is a noticeable increase in the number of natural disasters.
- The technological revolution, which is increasing the capitalization of its companies by billions of euros, will necessarily undergo a global correction. Its implementation, according to the expert, also has no defined effect. “AI may be very good in many things, but some caution has to be conveyed”.
- Tax adjustment. A priority stated by many regions as economic policy, it is necessary to reduce public spending or raise taxes with current interest rates.
Conclusions
The central scenario for the coming years, Jiménez repeated at the end of his talk, is lower growth and lower inflation, without taking into account the possible adverse shocks reported in the previous section. In this context, the USA will outperform Europe, while regions such as Latin America will surprise by keeping their growth steady, with inflation under control and a stable currency.
Controlling geopolitical risks will be key in this general environment of subdued growth, high inflation and overvalued markets, where any movement can generate nervousness, as well as natural disasters, which keep increasing.
Ultimately, the expert claimed that historic peaks on exchanges may start a correction if high inflation persists or if credit deteriorates significantly. At some point, a process of reducing public debt must be initiated to be sustainable in the long term, promoting productivity versus competitiveness. “Countries don’t compete like companies – what they have to do is improve the day-to-day life of their population”, he concluded.
Access the video of the Current Economic Outlook seminar during MAPFRE’s International Global Risks Seminars in Málaga.
