5 Key Factors Influencing the Global Economy According to Munich Re’s 2023 Economic Outlook

From inflation to high interest rates, Munich Re's Economic Outlook 2023 dives into five key factors influencing global economic conditions.

By: Peggy Fogarty | February 21, 2023

While inflation is falling in many industrialized countries, it will remain higher than previous levels, exceeding the inflation targets set by the major central banks until at least 2024.

That’s one of the key takeaways from Munich Re’s Economic Outlook for 2023. Further, government interventions and geopolitical risks will impact the outlook for quite some time.

The outlook identified five key factors influencing the global economy. The critical issues include high inflation, low economic growth, a robust labor market, geopolitical tension and price shocks for energy and commodities.

“On the positive side, we can now say that the forecasts do not look as grim as many had expected half a year ago,” claims Dr. Michael Menhart, Munich Re’s global chief economist.

1) High Inflation and Low Economic Growth

Economic growth in Europe and the U.S. will be weak and likely experience stagflation. With inflation remaining high while the economic growth rate slows, we will see almost zero real economic growth, thereby impeding investment.

Dr. Michael Menhart, global chief economist, Munich Re

However, real growth in the U.S. and the eurozone could rise above 1% in 2024.

The International Monetary Fund supports this claim in its January 2023 World Economic Outlook Update. It envisions that global growth will fall to 2.9% in 2023 but rise to 3.1% in 2024, below the historical average of 3.8%.

Further, the report concluded that emerging markets will dominate global economic growth in 2023. China will resume its role as the engine of global growth. Consequences from the intense COVID-19 wave and housing market problems continue to weaken the country’s economic development. While Chinese economic growth is expected to recover between 4% and 5% in 2023 compared to 3% in 2022, it will remain far from the growth rates seen in the past.

“Inflation remains challenging. While overall inflation numbers are turning downwards, underlying inflation pressures continue to be elevated for most of the advanced economies,” said Menhart.

Moreover, this trend is expected to continue in 2023. This claim is backed by the International Monetary Fund, which anticipates global inflation falling to 6.6% in 2023 and 4.3% in 2024, still above pre-pandemic levels.

Nevertheless, price increases are expected to remain well above targets set by central banks well into 2024.

2) Strong Labor Markets

Relatively robust labor markets, however, should prevent the global economy from slipping into a sharp recession.

The adverse macroeconomic impact of high inflation on households’ real incomes will be mitigated by relatively stable labor markets and solid employment figures.

In industrialized countries, in particular, high inflation and falling real incomes are putting a noticeable strain on the demand for consumer goods. In addition, the strong recovery experienced in consumption following 2020’s COVID-19-induced recession is now slowing to a stop.

As for companies, less favorable financing conditions impede investment, owing to higher interest rates.

3) Geopolitical Tensions

The Russian-Ukraine conflict and increased tensions between the U.S. and China continue to negatively impact the global economy.

Furthermore, Middle East politics pose geopolitical risks that could significantly impact the economic outlook.

“Against this background, global growth will be rather weak in 2023,” Menhart said.

4) High Interest Rates

Persistently high inflation and economic stagnation create a credibility dilemma for central banks.

“Will they be ready for as many rate hikes as necessary, and will they succeed in bringing down inflation without inducing a recession?” Menhart said.

Controlling inflation will prove more challenging for the European Central Bank, which started raising rates later than the U.S. Fed, mainly because the inflation outlook for the eurozone is clouded by more significant uncertainty compared to the U.S.

This outlook is influenced by significant risks, including, in particular, a further escalation of the Russian war against Ukraine with renewed price shocks for energy and commodities.

Furthermore, there is a risk of a potential recession due to central banks raising interest rates too sharply.

5) Price Shocks for Energy and Commodities

Following the Russian invasion of Ukraine in 2022, the energy and commodity markets have become critical macroeconomic drivers. Additionally, commodity markets have become a decisive factor influencing the global economy.

Fears that the supply of natural gas in Europe could be restricted and that a severe recession could be imminent have proved to be unfounded so far.

However, the effects of last year’s record energy prices on inflation will continue to leave their mark on growth in 2023. Moreover, a reliable supply of natural gas for Europe in the winter of 2023/24 is by no means guaranteed as things stand. &

Peggy Fogarty is a business development and technical writing specialist. She is a graduate of the University of Arizona, where she received her master’s degree in family and consumer sciences, and Rutgers University, where she received her bachelor’s degree in anthropology and urban studies. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

5 Key Factors Influencing the Global Economy According to Munich Re’s 2023 Economic Outlook