Global economy

Economic experts expect 2016 to bring a positive continuation of cyclical momentum on a slightly higher level: in its year-end forecast the Kiel Institute for the World Economy anticipates growth of 3.4% for the global economy in 2016, which is 0.3 percentage points stronger than in 2015.

The upturn in the developed economies will generally be sustained: monetary policy, which for the most part remains expansionary, gradually rising wages and the low price of oil are supporting progressive deleveraging processes in the private sector and boosting business activity. Expansion in emerging markets will initially continue to be curtailed by low commodity prices and structural problems, although the state of the economy in this group of countries is expected to bounce back little by little.

The risks to the economy seen in recent years still exist: on the political front, the development of flashpoints in the Near and Middle East is especially hard to foresee. The expansion of crisis zones or an upsurge in terrorist activity could unsettle markets and undermine the anticipated global economic growth. Furthermore, geopolitically induced turmoil on financial markets cannot be ruled out: interest rate hikes in the United States, for example, could have increasingly negative repercussions on the world economy, especially because numerous countries are still in the throes of a restructuring process. As additional factors, movements in the oil price and the pace of growth in China are likely to impact the markets.

United States

Output in the United States is set to rise by 2.8% in 2016. With sales prospects looking brighter at home and abroad, the increase in corporate investment, in particular, will likely be sustained. Consumer spending is also continuing to trend clearly higher. Further improvement on the labour market will bring about progressive wage growth.

Europe

The Eurozone economy is gradually picking up momentum. The moderate revival in the winter months will in all likelihood be sustained for the entirety of 2016. Nevertheless, the structural problems affecting parts of the currency area will stubbornly persist. Growth is expected to come in slightly higher than in the previous year at 1.7%. Despite trending upwards, the increase in consumer prices in the Eurozone will continue to be very low at 1.0%. The unemployment rate is trending lower: it is forecast to nudge modestly lower again to 10.4%. The United Kingdom should generate growth almost on a par with the previous year at 2.3%.

Germany

After the growth in total output had slowed somewhat of late, there are signs of an appreciably accelerated pace of expansion in 2016. Particularly in the service sector, growth expectations are higher than at any point since the reunification boom. The experts at the Kiel Institute for the World Economy anticipate a growth rate of 2.2% for 2016 with a modestly rising tendency. Growth will continue to be driven primarily by stronger private consumption, which will be fed by sharply higher disposable incomes of private households. Corporate investment will see further expansion in an extremely favourable financing climate. Exporters have enjoyed a surge in competitiveness with the devaluation of the euro. This may lead to stronger exports and stimulate capital investment as the expansion picks up pace. A new factor affecting the economy is the high level of refugee migration, which will give an added boost to spending. The restraining influence of foreign markets that has been felt of late will fade, giving way to increasingly stimulating effects on the economy. Growth momentum is picking up in the countries that are Germany’s major customers.

In the assessment of the Kiel Institute for the World Economy, employment will continue to trend higher, accompanied by appreciable wage growth. The fall in unemployment will, however, come to a halt as a consequence of the considerable influx of refugees. The jobless rate is expected to remain at around 6.3%.

China, India, Japan

Developments in emerging economies will continue to be hampered for the time being by low commodity prices and structural difficulties, although business activity in these markets too should gradually stabilise. Overall, the contribution made by these countries to global growth will fall short of the high levels seen in past years. The room for manoeuvre in fiscal policy remains very limited in many emerging markets because monetary policy there is geared more towards stabilising the currency than stimulating the economy. The government in China implemented numerous measures last year to prop up demand. In the assessment of economic experts, however, these steps will not suffice to bring about the desired structural shift towards a financially and environmentally more sustainable economy, not to mention one geared more towards private consumption. Nevertheless, they will likely result in the pace of expansion easing only slightly in the forecast period. Growth of 6.5% is anticipated for China in 2016, with a modestly slowing tendency.

Capital markets

The decision of the European Central Bank to stand by its low interest rate policy and purchase government bonds over an extended timeframe is intended to protect the Eurozone against the threat of deflation. The US Federal Reserve, by contrast, moved away from its expansionary interest rate policy and set in motion a cycle of rate hikes for the first time in almost a decade. This should be reflected in a continued strong US dollar. The next steps taken by the Federal Reserve and the signals that it sends out will come under particularly close scrutiny throughout 2016. The US central bank finds itself compelled to walk a fine line between the potential need for additional interest rate moves and the risk of adversely affecting the flow of money into other countries and weakening the US economy through precisely these measures.

International bond markets will again be shaped by below-average and increasingly divergent interest rate levels in 2016. In the relevant currency areas for our company we anticipate flatter yield curves. With respect to government bonds with higher risk premiums issued by countries of the European Monetary Union that have been the focus of so much attention of late, the situation should continue to stabilise. Generally speaking, the increased volatility observed on the capital market since the summer of 2015 is not expected to diminish. The effects of currency and oil price movements should therefore be all the more pronounced, with more risks than opportunities anticipated at this point in time for the world economy – also with an eye to geopolitical concerns. The consolidation of public finances in the industrial nations and the advanced phase of the credit cycle in the United States will continue to preoccupy the economic environment; they may, however, be more than offset by resurgent private consumption. In view of the existing uncertainties, broad diversification within the investment portfolio will therefore continue to be of considerable importance in 2016.

Insurance industry

According to general industry assessments, the international insurance industry will find itself operating in an environment in 2016 that is comparable with the previous year. Two key issues will continue to be the low Interest rate policy and implications of the implementation of Solvency II or similar regulatory regimes in many major markets around the world at the start of this year. They are helping to ensure that the insurance industry remains heavily focused on efficiency, shoring up its profitability and innovating on both the product and service side. Irrespective of the challenges that it is facing, the insurance sector should still remain on a stable course in the current year.

Along with Europe (Solvency II) and China (C-ROSS), South Africa will also be adopting a risk-based solvency system (Solvency Assessment and Management) during the year or at the beginning of 2017 at the latest.

The (re)insurance market had already witnessed various notable mergers and acquisitions in 2015. This trend is likely to be not only sustained but even accentuated in 2016, given that increased competition is making it especially difficult for smaller (re)insurers to generate their target margins. What is more, it is evident that primary insurers and contracting parties are tending to turn to highly profitable reinsurers with an above-average rating who can fall back on strong balance sheets and a positive cash flow. This has been accompanied by rising demand for partners with a diversified range of products and services.

Generating growth in what continues to be a highly competitive environment will doubtless remain a real challenge in 2016. Furthermore, industry experts anticipate stable or slightly lower premiums. If 2016 should again pass off without large losses from natural catastrophes or if reinsurers post adequate returns on equity from the perspective of shareholders, the soft market phase is likely to continue.