US growth forecast not as robust as suggested – Swiss Re

US growth forecast not as robust as suggested – Swiss Re | Insurance Business New Zealand

Reinsurance

US growth forecast not as robust as suggested – Swiss Re

Reinsurer warns of the “carry-over effects”

Reinsurance

By
Kenneth Araullo

The Swiss Re Institute has updated its forecast for the US economy’s growth to 2.2% for the year, a notable adjustment from previous estimates. However, the giant reinsurer explains that this upward revision does not necessarily translate to direct benefits for the insurance sector.

As per the reinsurer’s insights, the increase is attributed to significant “carry-over effects” from the prior year, particularly after the US economy expanded at a 3.3% annualized rate in the last quarter of 2023, resulting in a 1.3% carry-over into 2024. This statistical adjustment boosts the headline growth figure but obscures the anticipated economic deceleration.

Despite the optimistic revision, the outlook for the US economy remains cautious, with expectations of a forthcoming slowdown characterized by four quarters of below-trend growth. This contrasts with the situation in the euro area, where the forecast for 2024 remains unchanged at 0.3% real GDP growth, reflecting a continued weak growth environment without the distortion of carry-over effects.

The sustained economic momentum that led to strong carry-over effects is expected to limit monetary policy easing in the US, maintaining relatively high-interest rates. This environment could offer insurers some benefits in terms of investment returns, yet the sector faces challenges.

These hurdles, Swiss Re explained, include potential stress from reduced consumer and corporate demand, the prospect of rising business insolvencies, and asset price volatility amid uncertain timing for interest rate adjustments.

The insurance and broader financial sectors are urged to brace for these mixed implications. While high-interest rates may bolster investment returns in the short term, the overall economic slowdown and its impact on financial markets could introduce volatility and repricing risks.

Additionally, the economic downturn may strain specific insurance lines vulnerable to economic cycles, such as credit and surety, due to increasing corporate insolvencies, diminished trade flows, and softer consumer spending.

While the US GDP growth forecast for 2024 has been significantly raised, the underlying economic conditions suggest a cautious approach for the insurance industry. Re/insurers are advised to prepare for a complex landscape with both opportunities and challenges ahead, as the effects of economic policies and market dynamics continue to unfold.

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