Macroeconomic developments (e.g. monetary policies, austerity programs, commodity price increase, deflation, inflation) rank 8 (13%)
Interest rates will remain low for a very long time in the US and for an even longer period in Europe. According to Allianz Research estimates, the US Federal Reserve System is likely to envisage a first rate hike from Q3 2023 only. Although other central banks tend to follow suit most of the time, the European Central Bank (ECB) will have a hard time doing so because the perspective of the Fed’s monetary policy normalization is likely to awaken the beast of sovereign debt risk in Europe. This might incite the ECB to extend its unconventional monetary program beyond the Fed’s own program to contain Euro-zone sovereign spreads.
“For markets, low interest rates are a sweet poison,” says Ludovic Subran, Chief Economist at Allianz. “They strip markets and banks of their ability to price and allocate resources appropriately and encourage excessive risktaking by both debtors and investors.”
Equity markets are in bubble territory as earnings expectations have decoupled from fundamentals and credit spreads remain compressed despite record high levels of non-financial corporate debt. Sovereign spreads, too, remain muted despite the same situation in respect to record high public debt.
For the short-term economic outlook, confidence prevails. In 2021, global GDP should strongly rebound by +4.4% compared to the expected contraction of -4.5% in 2020. Besides huge ongoing monetary and fiscal impulses, the main growth driver in 2021 will be a positive “confidence shock”, triggered by the vaccination campaign, boosting consumption, investment and trade. In this growth scenario, the upside and downside risks are substantial. A fast and successful vaccination campaign could lift spirits even more, adding 2 percentage points to GDP growth.
The driver would be consumption powered by the unleashing of excess savings of households. In the Eurozone alone, around €500bn ($597bn) is estimated to be sitting on the sidelines, waiting to be spent. A botched vaccine campaign, however, would work in the opposite direction.
The mid- to long-term outlook is more pessimistic. In particular, the gigantic global debt burden of $277trn in 2020 will weigh on economic growth potential for the time being.
Pictures: Adobe Stock, iStock
10th Allianz Risk Barometer
The Allianz Risk Barometer is our annual report identifying the top corporate risks for the next 12 months and beyond, based on the insight of more than 2,700 risk management experts from 92 countries and territories.
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