Rating agencies might “freak out” at any sign of a downturn, but the global economy actually needs cyclical changes, one of Mapfre’s top economic researchers believes.

Things might not look too good for economic growth at the moment, but Mapfre director of macroeconomic and financial analysis Gonzalo de Cadenas Santiago told a packed business breakfast organised recently by Mapfre Middlesea and Mapfre MSV Life that these cycles have always been there and serve as an adjustment period that leads to new growth.

“What we saw in 2018 was the beginning of the path of gradual slowdown, and it was one that we have foreseen since the end of 2017,” he told the audience of representatives from financial services, insurance and other sectors.

Global growth stands at 0.2 per cent below the peak reached during the last five years. Forecasts for global activity have been downgraded from 3.6 per cent in 2018 to 3.3 per cent in 2019, and 3.2 per cent in 2020 and there are more than enough risks to keep his team busy trying to analyse outcomes. The Mapfre report forecasts that under a “risk scenario”, growth could be 2.2 per cent in 2019 and just 1.5 per cent in 2020.

Drawing extensively from the report drawn up annually by Mapfre, the Spanish insurance giant, he said there were many symptoms of a slowdown, such as the reduction in the temporary premium in the yield curves of developed countries, challenges faced by the financial accounts and balance sheets of corporate sector actors, high levels of public sector indebtedness in the developed world, excessively priced assets and distortions in global economic governance.

“The development of global economic indicators, the stock market correction experienced since the middle of the year, the fall in corporate profits and – in particular – the global correction of trade flows and foreign direct investment account for this. They are all symptoms of change, already palpable in trade, investment and global expectations.”

The danger, he stressed, was whether the change would be “orderly” or not: is the world facing a smooth international cycle of change that could be managed under current economic policy?

He said there were two possible outcomes: that the slowdown would provide an opportunity to correct the imbalances generated by the global economic policy of the past five years; or whether these imbalances could signal the gestation process of a new global crisis. Mapfre’s forecast leaned toward the first option, he reassured.

The greatest risks in the short term are not geopolitical but policies. Too many countries are putting a political agenda in front of the general agenda

However, there are still risks lurking in the shadows, and if anything, some of the latent risks reported a year ago are not only still there but – in some cases – have become more likely.

“Of course, the possibility of a global recession is there. But the only factor large enough to give rise to one is the US and there are no indications that this would happen.”

The report explains that the risk of recession arises when there is a “feedback” between sovereign risk and banking risk –which produced the eurozone crisis in 2011. This is not currently the case in the US and, within the eurozone, it represents a problem only in Italy.

Having said that, he fretted about what he described as “housekeeping problems” in EU Member States, which he said were getting worse.

What will this global economic slowdown look like? The report outlines three features: it will be increasingly asynchronous and fragile; it will be less intense in terms of activity and inflation; and it will take place in less favourable and divergent financial conditions. However, it does not see these giving rise to a global recession as there are no serious misalignments in balance sheets.

Although the immediate dangers revolve around the trade war and its effects on activity, the greatest risk identified by the report is related to pressure put onto institutions, he continued.

“The greatest risks in the short-term are not geopolitical but policies. Too many countries are putting a political agenda in front of the general agenda,” he said, mentioning as an example comments by US President Donald Trump which were seen as subtle pressure on the Federal Reserve.

“Decisions and policies need to be independent and driven by market forces,” he said.

“A monetary policy error in the United States, in the face of a possible upturn in volatility or the price of oil, could trigger the alternative risk scenario.”


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