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These are the two scenarios MAPFRE Economics is forecasting for the global economy

Aug 10, 2023

Redacción Mapfre

Redacción Mapfre

The last few years have been marked by uncertainty, making it increasingly difficult to predict what direction the economy is heading in. That's why MAPFRE Economics, MAPFRE’s research arm, always considers two different scenarios in its report “2023 Economic and Industry Outlook: Third Quarter Perspectives.”

In its baseline scenario, the growth forecast for the global economy falls by two decimal points, with the 2.8% growth predicted in the previous edition of the report now at 2.6%. As for 2024, growth is expected to fall even more: from the 3% forecasted in April, to 2.3% currently. In 2023, inflation is expected to close the year at 7% for the global economy as a whole, with next year's figure possibly standing at 4.9%.

On the other hand, the stressed scenario estimates 2.4% global growth this year and 1.7% for 2024, with higher inflation than in the baseline scenario: 7.4% in 2023 and 5.4% in 2024. These forecasts depart from what was expected for the second half of the year, as in its stressed scenario, MAPFRE Economics had anticipated 2% growth in 2023 and 2.3% in 2024, with similar inflation levels to the current forecast.  

 

Baseline scenario

For the remainder of 2023 and early 2024, we have maintained a baseline scenario of global stagflation, with growth still constrained by below-potential rates globally, particularly in developed markets, which continue to experience selective recessions and divergence in terms of growth, more evident depending on each country's predominant productive structure. The baseline is maintained, with a cyclical slowdown in demand that eases concerns about inflation, but whose effects are extended over time, supported by factors that prolong the expansive tone of consumption, labor markets that are maintaining some strength, and a fiscal policy that took longer than anticipated to shift towards neutrality (mainly in Europe), with the weaknesses this entails in terms of debt sustainability.

On the price side, a high-pressure scenario continues, trending downward but over a longer period of time, and declining at a slower pace (mainly in the core index) due to the aforementioned factors. Inflation has a much narrower support base (the contribution of raw materials, durable goods and the manufacturing sector is limited compared to the support of services, especially tourism), but greater potential to trigger second-round effects. Salaries are the next link in the price chain and a potential catalyst for this risk.

In turn, this panorama includes stricter financial conditions than the previous edition of this report had expected, with central banks in developed countries imposing an additional interest rate hike along with the one anticipated. At the geopolitical level, the forecast horizon remains unchanged, with the war in Ukraine, tensions over Taiwan, and other events of fragmentation and transition towards a multipolar world as an ongoing trend, albeit subject to the inherent volatility they may cause.  

 

Stressed scenario

Meanwhile, the stressed scenario (risk scenario) maintains the assumptions of the previous edition of this report, with a drop in global economic activity and rise in inflation that activate an environment of stricter financial conditions based on a more aggressive monetary policy and a moderate fiscal policy response, with increases in risk premiums that do not trigger a fiscal dominance event. Regarding activity, there is a marked erosion of purchasing power in consumption and investment, which begin to contract in the second half of 2023 and early 2024, with developed economies facing selective, yet deeper recessions. Meanwhile, emerging countries see their performance diminished by the drop in global demand.

Global growth continues to find support in Asia, especially in China, India and their satellite countries, and to a lesser extent, in other emerging countries in Latin America, Europe, the Middle East and Africa, with the developed regions making the smallest contribution. On the inflation side, in this risk scenario, the rise in prices is due to less cyclical and more structural forces, causing monetary policy to activate levers towards a higher terminal rate towards the end of the year. Real interest rates are more restrictive than anticipated for much of 2024, channeling into a decline in the labor markets that deepens the drop in consumption.

Consequently, countercyclical fiscal policies are only activated in a small group of countries, limited by fiscal space, and this is insufficient to serve as a cushion for previous shocks, such as in the energy sector. The change in financial conditions and decreased liquidity caused by more aggressive balance-sheet reduction programs lead to implicit volatility that implies a correction in risk assets, with global equities contracting 20% in their aggregate index, fixed income starting from a 10% correction in the 10-year duration, and the dollar strengthening again against other currencies (1.08 against the euro).

This amplifies the effects of the withdrawal of liquidity and a flight-to-quality that affects emerging currencies, which face outflows similar to the ones caused by previous shocks. Credit spreads widen in the range of 150 to 300 basis points, depending on the credit quality scale. Meanwhile, the real estate market suffers limited yet adverse contagion, with falls similar to those modeled for fixed income and wide divergences by region.

You can read the full report here

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