Global economy on growth path - but with numerous risks

Now that the European debt crisis has eased, the risk of individual countries ditching the euro or even of monetary union disintegrating altogether has faded into the background as one of the major risks to the global economy. Today, the main risks to the global economic outlook lie primarily in the numerous geopolitical conflicts and in expansive monetary policy, with very low inflation and the first signs of overheating on the financial markets. Allianz has analyzed the medium-term economic outlook with a base scenario and three risk scenarios.

Positive factors influencing economic development in the medium term include the favorable financing conditions for businesses and private households, as well as the economic impetus provided by lower risk premiums in the countries hit by the sovereign debt crisis. There is also pent-up demand for consumer durables and capital goods, and no significant bottlenecks in commodity supplies. Negative factors include the ongoing structural problems bedeviling the banking sector, and the need for public budget consolidation. On top of these come the high government debt ratios, deleveraging by private households and companies, and the increased insecurity resulting from geopolitical risks.


"In our base scenario, the positive factors are, on balance, likely to predominate slightly, although we are not likely to see the economy on a roll over the next few years. Both the USA and China no longer have the traction they used to have as growth engines of the global economy", said Michael Heise, Chief Economist at Allianz SE.


The next few years will see the industrialized nations return to stronger growth than we have seen over the past two years. In its base scenario, Allianz expects to see average annual GDP growth of just under 2.0 percent between 2014 and 2018, compared with 1.3 percent in 2012 and 1.1 percent in 2013.The US is likely to see stable economic growth averaging just shy of 2.5 percent over the next five years, pushing the unemployment rate back down to only 5 percent by the end of this period.

As for the euro area and Germany, annual GDP growth is estimated by Allianz to come in at a good 1.5 percent. In the former EMU crisis hotspots, the economic recovery and low capacity utilization should pave the way for growth of 3 to 5 percent, at least temporarily.


In the emerging markets, growth over the next few years will likely be roughly on a par with that seen over the past two years, averaging 4.5 to 5 percent. Stark differences, however, separate the emerging markets from each other.But China's high GDP growth rates of 6.5 to 7.5 percent a year are not a reflection of any particularly strong economic momentum.


In addition to its base scenario, Allianz has also set out a number of risk scenarios. Comparing the four scenarios, the probabiIity of the base scenario stands at 70 percent. Out of all of the risk scenarios, the economic boom/bust scenario is the one that is most likely to materialize, at 15 percent. Allianz has assigned a 5 to 10 percent probability weighting to both the hard landing in China and the deflation scenario in Europe.


Despite the current debate about deflation risks in the euro area, Allianz believes that the deflation scenario is much less likely to occur than the boom/bust scenario.This is because Allianz expects the low inflation rates in the eurozone to contribute to the economic recovery and sees no reason for any increased reluctance to spend or invest.


Heise: "With an economic revival under way, below-average capacity utilization, easing consolidation pressure and adjustment successes in the private sector and on the external trade front, we believe that the euro area is very unlikely to be hit by another economic slump. Such a slump could only be triggered by an external shock, such as a geopolitical crisis. Even this sort of shock, however, would not automatically result in deflation. Rather, it would merely increase the risk of deflation."


Allianz believes that there is a much higher risk of monetary policy remaining in crisis mode for far too long, the quest for returns fueling considerable excessive valuations and the increasing economic momentum translating into higher commodity prices, creating upside cost and price pressure and ultimately forcing monetary policy to slam on the brakes (boom/bust scenario). Allianz' base scenario is much more positive than the risk scenarios in terms of economic growth and developments on the financial markets. Even the base scenario, however, cannot hide the dark side of the extremely expansive monetary policy. Although this policy is boosting the economic revival in the crisis-ridden countries and helping to ensure that the upswing continues in the US, new adverse developments, like excessive valuations due to excessive risk appetite, will emerge in the medium term. "So in this respect, our base scenario is not too far removed from the boom/bust risk scenario. Nevertheless, we still expect monetary policy to have – and to use – the resources at its disposal to keep the spirits that it summoned at bay. In concrete terms, this means that, in 2015, first the Fed and somewhat later the ECB will initiate the normalization of monetary policy with initial rate hikes", said Heise.

PDF (261 kb)