In a lively panel discussion at Insurance Investor Live Europe – on last Thursday in London – several senior leaders in the insurance industry said that they forecast new opportunities in the post-pandemic, post-peak inflation market.
The first panel discussion of the day, “What are the economic drivers and what are the pitfalls: inflation versus stagflation, new geopolitical risks post Russia/Ukraine, and the Covid pandemic”, saw moderator Wick Egan, Vice President at Egan-Jones, joined by James Sproule, Chief Economist, Handelsbanken, Patrick Saner, Head of Macro Strategy, Swiss Re Institute, Aileen Mathieson, Group Chief Investment Officer, Aspen, and Tom Sumpster, Head of Private Markets at Phoenix Group. The discussion covered the wide-ranging macroeconomic conditions affecting the market and addressed views as to where the market could head in 2023 – with the panellists agreeing that conditions were tough but not without light at the end of the tunnel.
“Now economic growth is looking positive, with the trade-off between
supply and demand. Disinflation isn’t happening as quickly as we thought.”
The question of a potential – or current – recession was particularly salient. “I don’t think we’re in a recession,” said Saner. His reasons were diverse and included scepticism around the expected collapse of European energy infrastructure (due to Russian gas being withdrawn), which he saw as unlikely, and the fact that unemployment rates are relatively stable.
“The [winter] weather, which we had a lot of fears about, was much more benign,” he said. “Now economic growth is looking positive, with the trade-off between supply and demand. Disinflation isn’t happening as quickly as we thought.”
Saner added that the mix of reasons causing inflation – including oil and gas prices, commodities, and various countries’ responses to these higher prices – were all contributing to the wider market in 2023.
This was especially the case for supply chains, which he and other panellists said were often undervalued in terms of their effect and therefore must be watched more closely. “If you look at the global commodity supply, then copper is essential for a lot of things, and if you look at copper supply available on exchanges it’s four days, and for zinc it’s one day, so it doesn’t take a lot to shake up this equilibrium,” he said.
When speaking about wider economic conditions, several of the panellists raised the prospect of Japan’s GDP to debt ratio as a key concern for 2023. “Japan is outlier, though you could argue that the inflationary pressures there aren’t as strong as they are elsewhere,” said Saner.
However, the panel debate also saw post pandemic effects discussed through the lens of the labour market – with all participants agreeing that it had significantly shaken up working conditions, which would affect certain asset classes as well as the reality of doing business daily.
“If you look at surveys of medium sized enterprises in Europe, they find it extremely difficult to find sufficient qualified labour,” Saner said. “Labour pressures are probably real, which means the fear of higher wages factors into higher prices.”
“Participants haven’t looked at what’s happening in terms of quantitative
tightening enough in the US and Eurozone.”
James Sproule, however, focused more on the UK, where economic conditions were different to continental Europe, he said – though he stressed this wasn’t just due to the much-blamed Brexit effect. “In the UK, we are likely to see a recession. The UK government has increased taxes, which is strange to do in these conditions,” he said.
Like Saner, Sproule added that energy costs were a key factor – and that mortgages have also added to the circumstances. “Market conditions could get better invested, and participants haven’t looked at what’s happening in terms of quantitative tightening enough in the US and Eurozone.”
Sproule explained that the UK economy was going through extra changes that other countries were not experiencing due to the Brexit effects – especially on the labour market. Hundreds of thousands of older workers had retired during the pandemic like in other countries, but many low-wage migrant workers from eastern Europe had also been lost, which had altered the labour force.
“There is less low-cost labour coming into the country,” he said. “Higher productivity in the economy has long been a goal of the UK government and we see that.”
Mathieson, who represented the only P&C insurer on the panel (Aspen), agreed with Sproule that North American and European/UK market conditions were different when it came to recession predictions. “For the US, it’d be a mild recession because the unemployment rate isn’t high, and inflation is starting to come down,” she said.
“However, for the UK and the Eurozone, the consensus is that the unemployment rate will rise, and other factors such as more reliance on oil imports and an older workforce means that it will see a worse recession.”
"There’s a lot of noise in the US in real estate class. Residential is holding
up because of rental supply.”
On the other hand, Sumpster said the US’s distance from Ukraine will enable it to see a shallower recession due to several factors. “This market is hung right now when it comes to allocations and transactions especially in Europe. I don’t think we’ll go back to the low investment rate we had for ten years, but people did get very comfortable in that market.”
He added: “We’re weighting more to the US. We’ll see rates coming down in 2024.”
Several panellists focused on the real estate asset class as a potential saviour – and also a canary in the coal mine for economic health. Sproule said he expected house price drops but that this wouldn’t be as painful for the consumer because of inflationary price rises providing a cushion.
“There’s a lot of noise in the US in real estate class,” said Mathieson, sticking with the asset line. “Residential is holding up because of rental supply. People are trying to move, especially with unemployment not going up.”
