DR GERD Klöewer looks at the prospects for the Eurozone, the economic growth of the emerging markets and Takaful developments in 2012.
The continued malaise in the European financial markets largely reflects a lack of faith in the ability of major industrialized nations to restore sustainable government finances. The downgrade of the US credit rating in August exacerbated the situation. Together with the debt crisis in some EU countries, this dangerous situation in the financial markets is putting pressure on the real economy as well.
Economic development in the US came as a disappointment in the first half of the year. On the back of the weak development at the start of the year, the US economy and financial market are expected to grow by only 1.6% this year. In a prognosis from the Rhine-Westphalia Institute for Economic Research, Allianz and the German Insurance Association, we can expect an increase in insurance premiums of 1.8% in 2012.
After making a strong start to the new year with quarter-on-quarter growth of about 0.8%, the economic recovery in the euro area tapered off in the second three months of the year (+0.2% quarter-on-quarter).
Hopes of a moderate economic recovery in the Eurozone in 2012 are nevertheless, being fueled by the continued global growth, as well as by the European Central Bank’s determination to stick to its accommodative monetary policy. The policy of unlimited liquidity should continue to ensure that the European banking system does not face any restrictions on the liquidity side.
The Greek government will manage, with the help of EU experts Troika, to stabilize its economy in the course of 2012. The more flexible European Financial Stability Facility will be able to start work without any delays once it has been approved by all the 17 national Economic and Monetary Union (EMU) parliaments.
Furthermore, the other highly-indebted EMU countries will also exercise stringent budget discipline, clocking up robust consolidation successes. Against the backdrop of the above, the financial markets will gradually regain their composure and volatility should fall considerably.
All in all, we expect to see a moderate upward economic trend in the Eurozone in 2012, despite heightened downside risks. We forecast an increase in gross domestic product (GDP) for the region of 1.7% this year and 1.4% next year.
Emerging markets
Following the strong economic development in the Asian and Latin American emerging markets, China in particular has been attempting to combat economic overheating (due to a real estate boom; the risk of a marked increase in non-performing loans following the excessive lending habits seen in recent years; and considerable consumer price inflation).
Asia is likely to remain the world’s fastest-growing region next year. We forecast an economic growth of 7.3% compared with 7.8% this year, with the predicted slowdown by half a percentage point explained mainly by the assumed growth slowdown in China. The Latin American emerging markets are likely to achieve growth on a par with 2011, with a predicted growth rate of just under 4%. In eastern Europe, growth in 2012 is expected to come in at 3.7%, slightly higher than in 2011 (+3.6%). The higher growth is, however, solely thanks to countries outside of the EU, such as Russia. In eastern European EU countries, on the other hand, growth in 2012 is expected to be weaker.
Premium income in eastern European non-EU countries will not continue to grow due to the restrained developments in the Eurozone. Following the economic growth of 6.1% in 2011, we predict a GDP growth of 5.6% for emerging markets next year.
What does all of this mean for the global insurance economy as a whole? After a 4.1% rise in global output last year, the figure is expected to come in at 2.9% in 2011 (country weighting based on current exchange rates in each case).
Moving forward, we expect the global economy to expand by 3.1% in 2012. The fact that this growth rate is slightly higher than last year is largely thanks to Japan, where we expect to see above-average growth in 2012 compared to the other industrialized nations after this year’s economic slump, sparked by the 2011 catastrophes.
Exchange rate fluctuations
The exchange rate between the US dollar and the euro fluctuated within a fairly narrow range of between 1.40 and 1.45 US$/EUR for much of 2011. The escalation of the EMU sovereign debt crisis, coupled with mounting economic concerns, sparked a rapid downward spiral in September 2011; some of which, however, has already been compensated for.
A renewed plummet in the value of the euro towards the 1.25 US$/EUR mark cannot be ruled out in an environment that remains dominated by extremely jittery financial markets, as well as uncertainty as to how the debt crisis will unravel further. By the end of next year, we expect to see an exchange rate between the two currencies of 1.35 US$/EUR. The US dollar is likely to be hit not only by the ongoing need for consolidation in the US, but also by the progress we expect to see in the restructuring of EMU state finances.
Takaful developments in 2012
In 2012, the global Takaful markets are entering into a new and changing business environment as the current Eurozone crisis threatens to have global repercussions. However, in some European markets like the UK, there is no doubt that the future of the global Takaful industry remains positive.
The reason the Takaful market survived the last financial crisis was due to its policy of avoiding speculation, derivatives and the more doubtful products of modern investment banking. The leading Takaful operators are now rapidly positioning themselves to capitalize on new opportunities emerging from high growth segments such as Family Takaful.
In 2012, Islamic banks will continue to manage the challenges of an increasingly competitive global Takaful market, drive operational efficiencies in their businesses and successfully shift to sound underwriting profitability.
The main message of Islamic finance, while ethical, is also universal. At a time when world leaders are calling for moral reforms, it is appropriate to have our financial systems rebuilt on widely accepted ethical and moral basis to serve the common good of humanity.
With the current global Takaful contributions standing at less than 1% of the total insurance premiums universe, the scope for growth is huge.
Outlook for the Eurozone
In the economic base scenario, it is assumed that the sovereign debt crisis will be successfully kept under control in the months ahead.
Although markets will remain jittery, there will be neither a renewed banking crisis nor serious contagion of Italy or Spain. Despite repeated interjections calling for a stiffer haircut for Greece, the Troika will stick to its course and focus on the implementation of the promised reforms; and the pact to involve private creditors will not be unraveled.
Although nobody believes that Greece is over the worst, there is some doubt as to whether further debt cancellation would be helpful. A move like this would definitely not automatically improve Greece’s growth prospects or make market participants any more willing to lend Greece new funds; and the country would remain reliant on aid from the European Financial Stability Facility.
Before debt relief can be considered, a situation would definitely have to be created in which the Greek state did not require any more loans, at least not to finance its current budget (excluding interest payments).
Otherwise, the country would soon fall into the next trap of excessive debt. It is also very optimistic to assume that radical debt cancellation would calm the markets down. The situation in Greece would remain uncertain, and countries like Ireland and Portugal are still far from out of the woods yet.
A major debt cancellation would be more likely to trigger a further loss of confidence, which would come part and parcel with renewed uncertainty. It is important to remember that even the involvement of private creditors did not help the markets to simmer down, but actually increased the risk premiums for Italy and Spain.
As a result, the best option remains to provide further support, but at the same time to ensure that the (announced) reforms are really put into practice.
There is no fast, easy solution for Greece. The country remains one of the euro area’s problem areas. What is key is that the EU must prevent the situation from spreading to other countries, particularly Italy and Spain.
Worst case scenario — disintegration of monetary union
What happens if one or more countries leave the Eurozone, or if all EMU countries return to their national currencies? If a number of highly indebted EU countries left the Eurozone, would it ultimately leave a core monetary union comprising of Germany, France, the Benelux countries and Austria?
The economic costs incurred by Germany and such, if the single currency area was to shrink, would be immense. In many cases debt cancellation, with far-reaching restrictions on the movement of capital, would be necessary. As a result, it is highly likely that we would see a Europe-wide crisis in corporate financing and, finally, a global confidence and financial crisis.
If some countries leave the Eurozone, it is plausible to expect the ‘core euro’ to appreciate by about 20% against all relevant currencies. The appreciation could be 30-40% against currencies of highly indebted European countries like Greece, Portugal, Ireland, Greece and Spain, and 10-15% against the US dollar.
Any long-term appreciation in the trade-weighted external value to the tune of 20% would therefore result in export losses of around 15% within the space of a year. Since exports in Germany now account for 50% of GDP, export losses of 15% would slice between 4-7.5% of its GDP.
All in all, Europe will survive the Eurocrisis.
Dr Gerd Klöewer has worked for 30 years for the International Association of Islamic Banks, the German Insurance Association, the Winterthur-Zurich group, and the European Union. He can be contacted at
[email protected]
.