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Economic developments
Global economy
Economic experts expect 2017 to bring a modest pickup in cyclical momentum: in its year-end forecast the Kiel Institute for the World Economy anticipates growth of 3.6% for the global economy in 2017, which is 0.5 percentage points stronger than in 2016.
The upturn in developed economies will gain somewhat in momentum, albeit at a tempered pace. Growth will be supported by a continued accommodative monetary policy, fiscal stimuli and a slight strengthening of demand in developing and emerging nations. While China probably will not quite be able to sustain its growth rates, expansion in the other emerging economies will likely continue to accelerate. The recent rebound in commodity prices should also play a part here. In Russia output is expected to pick up again, whereas in Brazil the economic recovery will still take a while to materialise.
The risks to the economy of recent years remain in play: the US administration has announced numerous changes – giving rise to considerable uncertainties on both the economic and political fronts. Not only that, elections are upcoming in several major European nations that may give rise to fundamental shifts in economic policy. It also remains unclear to date how the United Kingdom will navigate its withdrawal from the European Union. Quite apart from that, monetary policy and low interest rates are now reaching their limits: especially in the financial sector, for example, the negative repercussions of ultra-low interest rates are making themselves felt.
| Growth in gross domestic product (GDP) | |||
| in % | 2016 (forecast from previous year) | 2016 (provisional calculation) | 2017 (forecast) |
|---|---|---|---|
| Economic areas | |||
| World economy | 3.4 | 3.5 | 3.6 |
| Eurozone | 1.7 | 1.7 | 1.7 |
| Selected countries | |||
| United States | 2.8 | 1.6 | 2.5 |
| China | 6.5 | 6.6 | 6.4 |
| India | 7.2 | 7.1 | 6.8 |
| Japan | 1.0 | 1.0 | 1.2 |
| Germany | 2.2 | 1.9 | 1.7 |
| Source: Kiel Institute for the World Economy | |||
United States
The economic implications of the transition in the White House are hard to evaluate. Although the new President’s election manifesto has hitherto remained largely unspecific, clearly expansionary signs can be discerned when it comes to fiscal policy. Substantial tax cuts have been promised and extensive spending programmes announced. Rising prices on US stock markets in the weeks following the election testify to the high expectations of capital market players for US fiscal policy in 2017. At the same time, it must be assumed that the US administration will take a critical stance on any strengthening of international trade ties. Such a protectionist approach may – in combination with emerging institutional uncertainty – lead to economic constraints in the medium term. For the current 2017 financial year, however, growth is expected to expand by 0.9 percentage points to 2.5%.
Europe
The Eurozone economy looks set to maintain its moderate course and expand by 1.7%, as in the previous year. France should be able to stabilise its weak growth (+ 1.2%) and Spain will likely continue its expansion at a slower pace (+ 2.6%). In Italy the prospects of further reforms to overcome sluggish growth have deteriorated with the rejection of constitutional reform. Growth here will probably remain on a stubbornly low level (+ 0.8%). Greece is expected to experience a continued recovery (+ 1.9%), whereas the pace of growth in the United Kingdom will continue to soften (+ 1.2%). Bearing in mind that parliamentary elections are upcoming this year in four of the five largest EU Member States (Germany, France, Italy, Netherlands), the direction of economic policy is clouded by uncertainties.Consumer prices are expected to rise by 1.2% in the Eurozone and will hence remain on a low level despite the upward trend. The jobless numbers continue to trend lower: unemployment is forecast to retreat by 0.6 percentage points to 9.5%.
Germany
The German economy is poised for further growth, which will be driven by domestic stimuli. The experts at the Kiel Institute for the World Economy anticipate a growth rate of 1.7% for the current year with a rising tendency. The business community will step up its capital expenditures because prospects are encouraging – with capital utilisation already above average – and financing conditions remain attractive. Above all, construction investments are likely to grow at a rapid tempo. Private consumption will also continue to rise in view of the favourable state of the labour market and the considerable increases in federal state transfer payments. Overall, though, the pace of expansion will slow somewhat because the purchasing power of private households will shrink as the oil price moves higher. In this environment public budgets will continue to generate surpluses against a backdrop of appreciably higher revenues and expenditures.
Assisted by improved price competitiveness, exports will continue to pick up. Most notably, rising demand is anticipated from the United States – depending on developments affecting trade agreements –, the Eurozone and emerging markets. On the other hand, the lively domestic economy will lead to significant growth rates in imports. Business conditions will deteriorate slightly in this regard.
The upswing on the labour market will probably continue and go hand-in-hand with further wage increases. The Kiel Institute for the World Economy expects the jobless rate to fall by a further 0.2 percentage points in 2017 to 5.9%.
China, India, Japan
While the Chinese government was initially successful in reviving the economy in 2016 through accommodative monetary and fiscal policy actions, economic expansion is expected to slow over the coming years. This can be attributed to the continued existence of far-reaching structural problems such as inefficient capital allocation and an inadequate capacity for innovation. These can be obscured at most in the short term through state intervention. What is more, the already very high indebtedness of companies and local government will become even more bloated. For 2017 growth of 6.4% is anticipated, while for 2018 the figure is put at 5.9%.
India’s economy continues to live up to expectations with its good development and will generate growth of 6.8% in 2017, a figure marginally lower than in the previous year. In Japan economic growth remains weak despite the boost of massive economic stimulus. Growth will probably come in slightly higher than in the previous year at 1.2%, albeit trending lower for the year thereafter.
Capital markets
In 2017 financial markets are again likely to see promising growth opportunities but also an abundance of volatility. Most significantly, geopolitical risks, protectionism and populism have the potential for adverse repercussions in some areas. Attention will be focused on two main arenas: firstly, Europe, where the Brexit vote has still to be translated into political and economic practice, and secondly, the United States, where the handover of power in the White House is highly anticipated.
The European Central Bank’s decision to maintain its low interest rate policy on a historically low level and purchase bonds over an even more extended timeframe is intended to support the Eurozone economy and bring inflation closer to the ECB’s 2% target. An increasingly large chorus of voices is, however, warning about the growing risks of this policy for the economy and for markets.
The US Federal Reserve, by contrast, will move further away from an expansionary interest rate policy and press ahead with its cycle of rate hikes. This will likely be reflected in a continued strong US dollar. The Federal Reserve’s next steps and communications are awaited with considerable anticipation, as it seeks to walk a fine line between the potential need for additional interest rate moves and the risk of depriving other markets of cash flows through precisely these measures.
International bond markets will again see below-average and increasingly divergent interest rate levels in 2017. In the relevant currency areas for our company we expect yield curves to slope steeply upwards. For the most part, government bonds with higher risk premiums issued by countries of the European Monetary Union that have been the focus of so much attention of late should continue to stabilise. The prevailing credit cycle in the United States, which has proven its durability, and the stabilisation of emerging markets will continue to shape the economic environment. This may potentially be positively influenced by the ending of the austerity drives undertaken by several industrial nations and by a worldwide upswing in private consumption.
Compared to the soaring valuations of US shares, which already performed exceptionally well in 2016, equities in Europe and emerging markets are lagging somewhat behind the cycle. The extent to which the effects of Donald Trump’s election to the office of US President – which had already been factored into valuations – will be reversed by negative geopolitical or trade-restrictive measures remains one of the key questions for 2017, the implications of which will not leave Europe and emerging economies untouched.
All in all, 2017 will be distinguished by a very particular combination of geopolitical and monetary policy uncertainty, which will manifest itself in the form of increased volatility on financial markets. In view of this outlook, broad diversification within the investment portfolio will continue to be of considerable importance in 2017.
Insurance industry
The insurance industry will still find itself operating in a challenging environment in 2017. Faced with the low interest rate environment and diminished returns, market players are increasingly focusing their attention on efficiency, shoring up profitability and innovation. The Brexit decision in the United Kingdom and the new administration in the United States will bring additional uncertainties. One positive signal coming out of the US is the Federal Reserve’s move to turn its back on expansionary monetary policy. In Europe inflation is tracking away from zero into positive territory, which at least in the medium term holds the promise of an improved general environment. Despite the numerous challenges, experts foresee another stable trend in the current year for premiums in the insurance industry.
Responding to tighter solvency requirements, insurers have further optimised their capital and risk management. In conjunction with the increasingly widespread adoption of Enterprise Risk Management (ERM), they and large undertakings are tending to take out their (re)insurance protection on a centralised basis in order to be able to manage their growth and risks in an integrated manner. This, too, will likely add to the pressure for consolidation in the market.
Given the pressure on margins and surplus capacities, reinsurers will increasingly shift the focus of their products towards the quality factor. This also corresponds to the growing need for individualised solutions. In so doing, they will create tailor- made insurance products that at the same time actively support the strategic objectives and growth targets of their business partners.
The current changes on the insurance market present not only risks but also growth opportunities. An increasing need to protect against climate change, elevated political risks and the ever more important category of cyber risks are creating numerous entry points for the industry to launch new offerings. Digitisation will likely prove a particularly significant driver of change going forward. Not only will it open up new avenues for loss prevention, for example, it will also prompt the industry to cooperate more closely in future with partners from the technology sector. Cooperative ventures for the development of special underwriting tools and short-term policies and even extending as far as the cultivation of joint new business segments are possible.