Strong demand for insurance amid inflation risks and slowing growth
The global growth momentum in the first half of the year is beginning to weaken, and pandemic risks are once again on the rise.
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The global economy is set for a historically strong post-recession recovery, reaching projected GDP growth of 5.7% in 2021 and 4.3% in 2022. But the global growth momentum we saw in the first half of the year is beginning to weaken, and pandemic risks are once again on the rise.
At the same time, rising risk awareness and digitalisation will continue to drive insurance demand. All this has implications for the remainder of this year. Here's what to look out for:
First, the US economy has reached its pre-COVID levels of GDP, and growth is set to slow over the remainder of this year. In our view, the growth momentum will now shift to the euro area where recent vaccination success and reopening will start to show more visibly. We've therefore lowered our US growth forecast to 6% this year and raised our forecast for euro area GDP growth to 4.9%. The US and Europe are still lagging behind the Chinese economy, which is set to grow by an estimated 8.3%.
Second, the public health response to COVID-19 remains challenging around the world, as rising cases make pandemic setbacks a key risk to the global economy. The coronavirus and its mutations will continue to linger and pose a particular risk to the recovery in emerging markets where vaccination rates remain lower.
Third, there's no easy way out of the current interest rate environment. Long-term interest rates are likely to rise, but just slightly from current levels. The low yield environment is here to stay, even as global inflation pressures mount. This is because as long as the risk outlook remains skewed to the downside, policymakers will remain in accommodative mode.
Further, from a strategic perspective, central banks have indicated more acceptance of higher levels of inflation within their target ranges. As a result, we expect medium-term inflation to stay above pre-pandemic levels and remain elevated over the next one to three years. But there won't be an abrupt change of course on interest rates.
While threats to the recovery and inflation could be key risks for markets and insurers, the overall outlook for the insurance sector remains positive. Strong economic growth, hard rates, rising risk awareness and accelerating digitalisation will continue to drive demand for insurance. As the economic recovery, beyond its cyclical rebound, remains fragile and uneven, the role of the insurance industry as a shock absorber remains key to strengthening global resilience.
For full analysis, please see economic outlooks: