Economic growth will continue to trend higher in 2019, albeit at a reduced pace. In its year-end forecast the Kiel Institute for the World Economy expects growth to slow by 0.3 percentage points in 2019 to 3.4%. One of the reasons here is that capacity utilisation in the advanced economies will scarcely increase further. What is more, output in the emerging economies will expand at only a moderate tempo in view of a challenging fiscal climate and in many instances an unfavourable general environment. As a further factor, the deterioration in the trading environment will likely curb business activity.
The upswing seen in the advanced economies will lose momentum in the face of a slow tightening of expansionary monetary policy, diminishing stimuli on the fiscal policy side and only a moderate rise in demand from developing and emerging nations: after an increase of 2.4% in the year just ended output in the group of advanced economies is expected to rise by 2.1% in the current year.
The pace of growth in China is set to retreat again. Expansion will soften in the other emerging economies owing to more challenging fiscal framework conditions, but it is nevertheless expected to remain vigorous for the most part. Following an election year overshadowed by political uncertainty in Brazil and Mexico, growth in both of these Latin American powerhouse economies will pick up again in the current year. The negative growth contributions from Venezuela and Chile will likely be less marked in 2019. The Turkish economy is currently fading sharply in the midst of the crisis facing the country’s currency, and the growth rate in 2019 is expected to be just 0.4%.
Risks are posed in particular by a further ratcheting up of trade war tensions: although the spiralling disputes over market access that prompted the United States and China to impose reciprocal tariffs have been put on hold for the time being, the uncertainties swirling around the trade policy framework remain. Further potential for conflict exists between the United States and the European Union, where issues relating to the balance of trade are being fought over indirectly through the automobile manufacturing sector. In Europe the question of debt sustainability in Italy, the delays over implementing reforms in France and the possibility of a disorderly Brexit will be reflected in poorer economic growth than anticipated.
|Growth in gross domestic product (GDP)|
(forecast from previous year)
After an upward trend that has been sustained for close to ten years, the US economy has in all likelihood passed its peak. Investment activity was already significantly more muted in the second half of 2018; employment growth similarly slowed appreciably. This trend is set to continue in 2019. A further factor is the absence of additional stimuli from monetary and fiscal policy, as a consequence of which the pace of expansion will decline by 0.4 percentage points in 2019 to 2.5%. Growth continues to be supported by rising incomes and sustained positive consumer sentiment. Exports will soften sharply in 2019, not least due to trade wars. Despite all the trade policy actions taken, the US current account deficit will likely grow by a further 0.4 percentage points to 3.2%.
In the Eurozone, too, the pace of expansion is gradually easing. Growth will slow by 0.2 percentage points to 1.7%. Continued favourable financing conditions and an expansionary fiscal policy are nevertheless helping to keep the economy on an upward track. In addition, stronger impetus is set to come from foreign trade in the years ahead after a softer 2018. In France (+1.4%) and Italy (+0.7%) growth will slow further in the face of continued doubts surrounding reforms. Particularly in Italy, the pressure from financial markets may keep increasing in view of the high level of debt. While Portugal (+2.0%) will probably not be able to sustain the growth tempo of the previous year, growth in Greece (+2.5%) continues to trend higher.
In the United Kingdom the uncertainties surrounding what form Brexit will ultimately take remain in place for the time being and – according to calculations by the Kiel-based experts – have likely so far led to lost production in the order of 2% for the economy as whole. Irrespective of the new political and economic framework arrived at by the European Union and the United Kingdom, growth in the UK will decline again in 2019 to 1.0% owing to depressed consumer sentiment and a reluctance to invest. In this context it is to be anticipated that little will change in the trading relationship in the short term, given that the future arrangements still have to be elaborated in detail.
Even in the current phase of slightly fading upward momentum, unemployment in the Eurozone will continue to fall in 2019; the jobless rate is forecast to retreat from 8.2% in the previous year to 7.7%. Although core inflation is gradually picking up, the inflation rate of 1.5% in the current year will be slightly lower than in the previous year and remain below the target set by the ECB.
As far as Germany is concerned, the Kiel-based economists expect the positive trend to continue in 2019. Even though the federal government trimmed its expectation for 2019 GDP growth in January, the ending of temporary production curbs – especially in car manufacturing – will likely have positive implications for the pace of economic growth. Moreover, wide-ranging tax cuts and benefit extensions will increase the disposable income of households and give private consumer spending an added boost. Capacity bottlenecks in the construction sector will hamper more vigorous expansion and drive building costs even higher. Business investments will be on the level of the previous year against the backdrop of recurring uncertainties on international markets.
Exports are set to bounce back in the current year after the dip seen in 2018 and expected to rise by 3.6% (2018: 2.0%). Imports will be further bolstered by the brisk domestic economy, with the result that the value of imported goods will increase by 5.2% in 2019 (2018: 3.3%).
The job market will see continued employment growth and a further rise in wages driven by the increasingly scarce supply of labour. The jobless rate will retreat from an annual average of 5.2% in the previous year to 4.8% in the current year. The upsurge in prices seen in the previous year (+1.9%) is expected to gain momentum and climb to a good two percent in 2019.
Growth in China will continue to slow in 2019 and is forecast to contract by 0.5 percentage points to 6.1%. The tax cuts and public spending programmes recently approved by the government are aimed less at stimulating the economy – which was the case in past years – and more at containing the effects of possible punitive tariffs that may be imposed by the United States.
Supported by a successfully implemented programme of reforms, India’s economy will be able to very nearly sustain its high rate of expansion and is likely to grow by 7.5%. The country is thus on the verge of overtaking the United Kingdom and France to claim fifth spot among the world’s largest economies.
The growth rate in Japan, the world’s third-largest economy, is set to increase to a modest 1.0% in 2019. With a view to mitigating an economic cooldown resulting from a planned hike in the consumption tax, the government approved a record amount of public spending in December for the budget year starting in April 2019.
In 2019 financial markets will once again bring promising opportunities but also an abundance of volatility and uncertainty. Above all, geopolitical risks and protectionism have continued potential for adverse repercussions in some areas. Populist moves may increasingly leave their mark on the real economy. One of the primary arenas here remains Europe, where it is still impossible to foresee how the Brexit vote will be translated into political and economic reality. The second focus of attention is the United States, where the behaviour of political actors is difficult to predict and there is a risk of growing instability in view of their impact on global politics. It will be especially important to keep a close eye on trade disputes with China and other countries. Similarly, though, the tense ongoing dialogue between the European Union and Italy, France’s partial abandonment of its reform programme and the political shift in Brazil all have the potential to move markets.
The basic starting point for the world economy should nevertheless still be viewed as positive. While the general pace of expansion appears to be flagging, the resurgent emerging economies can still deliver stable growth. Just as the drop in the price of oil has the potential to hamper growth in the oil-exporting part of the world, it can stimulate growth in petroleum- processing economies.
The announcement by the ECB that it would finally be terminating its programme of corporate sector purchases at the end of 2018 after almost four years appears to herald a normalisation phase. This is despite the fact that in light of global political tensions and moves towards economic isolationism the ECB’s assessment of the economic outlook is no longer so rosy. Yet there are also no plans for an abrupt end to the anti-crisis mode, since the curtailment of bond purchases only applies to the investment of new funds; funds from maturing government and corporate bonds will continue to be reinvested. It does now appear that a first step towards raising the interest rate on deposits can be taken in 2019. Nevertheless, the ECB is expected to leave the key interest rate for the Eurozone at the historically low level of 0.00% at least until mid-year. The change in leadership at the helm of the ECB upcoming in the autumn is not likely to bring any significant shifts in the central bank’s approach.
In contrast, having already hiked rates in four increments in the year under review, the US Federal Reserve will continue to move away from the past expansionary policy in response to the economic upswing in the United States and is expected to press ahead along the path towards normalisation in 2019, albeit at a reduced tempo. This will further accentuate the interest differential between the US dollar and euro areas and may also be reflected in an even stronger US currency. The implications of personnel changes at the Fed for its policy going forward are a subject of considerable anticipation. The new team will similarly be challenged to keep inflation in check without jeopardising domestic consumption as well as to counteract systemic risks through an adequate overall policy. If it is to succeed in this balancing act, it must avoid market overheating without stifling the momentum for growth. It would seem that the central bankers at the Fed have so far been able to resist the actions urged by politicians and preserve their independence.
International bond markets will therefore once again see largely below-average and continued divergent interest rate levels in 2019. In the relevant currency areas for our company we expect slightly upsloping yield curves. For the most part, sovereign bonds with higher risk premiums issued by countries of the European Monetary Union that of late have been the focus of considerable attention should continue to stabilise, particularly in light of recent indications of a more harmonious interaction between the EU and Italy. The prevailing credit cycle in the United States – despite slowing momentum and higher premiums – as well as the stabilisation of emerging markets will continue to shape the economic environment. This can still be positively influenced by stable private consumption.
Having tended to move sideways (albeit on a high level) over large parts of 2018, equity markets came under pressure that was significant in some areas towards the end of the year as they became caught up in global uncertainties and a pervasive sense of unease. It is our expectation that this will continue in 2019 to varying degrees, although the upside potential is rather limited. Sharply higher risk premiums of late on industrials and financials also suggest that a great deal of uncertainty has already been priced in, although the speculative scope for price jumps would seem to be on the modest side. However, we only expect to see appreciable price declines if national economies drift into recession. On US markets it remains to be seen how lasting the effects of tax reform and higher government spending will be, because many economic actors are likely aware that lower tax receipts combined with higher expenditures create funding gaps that ultimately have to be filled with higher tax inflows in the future. Nor will Europe or the emerging markets escape the resulting uncertainties unscathed. In the latter case, however, we still see a positive scenario going forward as they have largely been able to channel the outside pressure of the past years into economic and fiscal optimisations. Based on more flexible labour markets and with inflation in check – a few exceptions notwithstanding –, we anticipate a sideways tendency here on the domestic economy side and stabilisation in foreign trade.
Once again, then, 2019 will be a year distinguished by an unusual and challenging combination of geopolitical and monetary policy uncertainty. In view of the increasing risks, even greater attention must be paid to the risk / reward ratio when making investment decisions. Consequently, broad diversification within the investment portfolio will continue to be of considerable importance in 2019.
Even though the insurance industry still finds itself facing numerous – in some cases considerable – challenges in the current financial year, the mood throughout the sector is gradually lifting. The reasons here include the prevailing upbeat business sentiment overall and the positive approach taken by the industry in addressing the demands of change. This includes the fact that many companies are now actively partnering with insurtechs, as new market entrants, in their business models and finding numerous nexus points for the development of new products.
The insurance industry continues to be preoccupied with the sustained, generally low level of interest rates and increasingly exacting regulatory requirements: the decision taken by the ECB in January of 2019 to keep the key reference rate at zero percent indicates that the Eurozone will not see any quick turning away from the ultra-low rate environment. Life insurers are particularly hard hit, having no choice but to adjust their business models. The US Federal Reserve, on the other hand, will likely press ahead along the path towards higher interest rates in 2019. Going forward, there is at least the prospect that this will also lead to a normalisation of interest rates in Europe. On the regulatory side it is evident that insurance supervisory authorities around the world are now expanding the focus of their attention to include not only solvency issues but also the supervision of market conduct. The topic of market conduct has, for example, already been included as a content item in the five-year strategic plan drawn up by the International Association of Insurance Supervisors (IAIS).
The industry also remains intensely preoccupied with changes in customer expectations. Against a backdrop of advancing digitalisation, consumers are showing greater agility in their behaviour. Customer expectations are also shifting significantly when it comes to benefits and services. Insurers are responding by enhancing the quality of their services, stepping up customer contact management and developing new products that live up to shifting requirements.
The pressure to act on cutting costs remains considerable, prompting market players to accelerate the drive towards digitalisation of their business processes. They are expanding automation of their back office processes and enhancing the flexibility of their IT structures, at the same time opening up further scope to improve customer care. The consolidation process that has already been ongoing in the reinsurance sector for a number of years will continue in 2019. Surplus capacities are thereby eliminated and efficiency is increased.
Reinsurers are continuing to shift their focus towards the quality of their products and services. This move is also prompted by the demand side, since their insurance partners are increasingly calling for bespoke solutions. Against this backdrop insurance products are created that actively support their partners’ strategic objectives and growth targets. Thus, for example, the increasing need to protect against climate change, elevated political risks and the ever more important segment of cyber risks continue to present the industry with numerous entry points for the launch of new products. The digital transformation of the industry, in particular, is opening up new avenues for loss prevention and for closer cooperation with partners from the technology sector.