Allianz Risk Barometer 2023 -
Rank 3: Macroeconomic developments

Expert risk article | January 2023
2022 started with high hopes for a continued global economic recovery after the Covid-19 crisis. The Russian invasion of Ukraine abruptly dashed these. Expectations for 2023 are correspondingly pessimistic, according to Allianz Research, ensuring a top three risk ranking for the first time since 2012.
The most important business risks for the next 12 months and beyond, based on the insight of 2,712 risk management experts from 94 countries and territories.

The current situation is characterized by one peculiarity: all three major economic areas – the US, China and Europe – are in crisis at the same time, albeit for different reasons, according to Allianz Research.In Europe, the Russian invasion of Ukraine and the ensuing energy crisis are at the forefront: exploding energy prices are driving inflation to ever new heights and “eating” into the entire price structure. The result is falling real incomes and corporate profits, with corresponding consequences for consumption, production and investment. Restrictive monetary policy to contain inflation expectations is rather counterproductive in this situation, but without alternative.

China, on the other hand, is much less affected by the war in Ukraine (and actually benefits from cheap energy supplies from Russia). The issues here are domestic, with two points particularly noteworthy: The easing of the strict zero-covid policy will stress-test the Chinese economy, while the weakness of the (huge) real estate sector remains a drag on consumer sentiment. As with the zero-covid policy, the latter owes itself to erratic economic policies that first allowed it to overheat and then brutally slammed on the brakes.

The US is also struggling with a crisis primarily of its own making. The ill-timed and oversized fiscal packages during and shortly after the pandemic fueled inflation. This has – somewhat belatedly – brought the Federal Reserve onto the scene, which is now trying to put the genie back in the inflation bottle with hefty interest rate hikes. The accompanying tightening of financing conditions is forcing companies and households to cut spending and is leading the economy straight into recession. Nowhere is this more evident than in the US housing market, which has seamlessly transitioned from Covid-19-induced soaring to freefall.Against this backdrop of widespread economic weakness, Allianz Research continues to forecast a recession both in Europe and in the US, expecting GDP growth to fall by -0.4 % (Euro-zone) and -0.3% (US), respectively. China, on the other hand, could grow by 4% in 2023, if the domestic post-Covid rebound starts to be felt in the second half of the year.

Ranking history:

  • 2022: 10
  • 2021: 8
  • 2020: 10
  • 2019: 13
  • 2018: 11 

Top risk in:

  • Bulgaria
  • Burundi
  • Croatia
  • Ghana
  • Greece
 
  • Madagascar
  • Nigeria
  • Poland
  • Turkey

Like the real economy, the financial markets are facing a challenging year, even if the disaster of 2022 – with unprecedented price corrections in both equities and fixed income – should not be repeated. But, as central banks drain excess system-wide liquidity, and trading volumes even in historically liquid markets decline, financial accidents need to be watched out for. With rising rates, financial stability risks are back, complicating the task for central bankers who are determined to fight inflation and make sure that it does not become entrenched. While the current hiking path is about to moderate, central banks’ independence will be tested either way, whether it’s erring on the side of keeping their monetary stance more restrictive for longer despite a looming recession, or throwing in the towel too early and risking stagflation for good.

So if monetary policy is preoccupied with fighting inflation, could fiscal policy step into the breach? At the moment, it looks very much like a new policy mix, with fiscal policy taking over the old role of monetary policy in stimulating demand. Finance ministers are outbidding each other in announcing ever new billions in relief measures for the cost-of-living crisis and industrial policies. But in view of the already record-high debts and rapidly rising interest rates, the scope for fiscal policy is rapidly narrowing. The British drama surrounding the so-called “mini-budget” has made it clear that the patience of the markets is finite, even for debtors who are solid in themselves. More likely than an active, high-spending fiscal policy in the coming years is the flare-up of debt crises and risks to financial market stability. The new policy mix is likely to be characterized not only by a restrictive monetary policy but also by a fiscal policy aimed at debt consolidation.

“2023 will be a challenging year. In purely economic terms, it is likely to be a year to forget for many households and companies. Nevertheless, there is no reason to despair,” says Ludovic Subran, Chief Economist at Allianz. “For one thing, the turnaround in interest rates is helping, not least for millions of savers. The medium-term outlook is also much brighter, despite – or rather because of – the energy crisis. The consequences, beyond the expected recession in 2023, are already becoming clear: a forced transformation of the economy in the direction of decarbonization as well as increased risk awareness in all parts of society, strengthening social and economic resilience.”

Picture: Adobe Stock

Inflationary pressures, monetary tightening, the energy crisis and supply chain disruptions are jeopardizing corporates’ cash flows. But many governments decided to tackle the current situation by deploying some strong fiscal policies. Will these measures be enough to contain a sharp increase in insolvencies at both global and local levels? After two years of decline, a broad-based acceleration is expected, according to Allianz Trade. Global business insolvencies should rise in 2023 (+19%), after +10% in 2022, a significant rebound which may bring global insolvencies back above their pre-pandemic levels by the end of the year (by +2%) it predicts.

“The rebound in business insolvencies is already a reality for most countries – at a global level, half of the countries we analyze have recorded double-digit increases in business insolvencies in the first half of 2022 – in particular the top European SME markets (the UK, France, Spain, the Netherlands, Belgium and Switzerland), which explain two-thirds of the rise,” explains Maxime Lemerle, Lead Analyst for Insolvency Research at Allianz Trade. “However, the US, China, Germany, Italy and Brazil are still registering prolonged low levels of insolvencies, but the trend should reverse in 2023.”

Europe will be particularly impacted again by this anticipated surge: Allianz Trade expects significant rises in France (+37%), the UK (+9%), Germany (+16%) and Italy (+33%). In Asia, China is expected to register +15% more insolvencies in 2023 on the back of low growth and a limited impact from monetary and fiscal easing. In the US, an increase of +33% in business insolvencies is forecast in 2023 as a result of tighter monetary and financial conditions.

How to explain this generalized surge in business insolvencies? Three major shocks may have a significant impact on corporates’ profitability:

The energy crisis will remain the largest profitability shock, in particular for European countries. At current levels, energy prices would wipe out the profits of most non-financial corporates as pricing power is diminishing amid slowing demand. If firms can pass one quarter of energy-price increases on to customers, they can withstand a price increase of below +50% and +40% in Germany and France, respectively.

Additionally, the interest rate shock is looming in the first half of 2023, along with the acceleration in wages in the wake of unprecedented inflation. In Europe, this is likely to be equivalent to the Covid-19 profitability shock of -4pp. As expected, high cash balances for corporates (still 43% above pre-Covid-19 levels in the US, +36% in the UK and +32% in the Euro-zone) have provided a significant buffer against the monetary policy normalization in 2022, but the worst is still to come. Overall, the rise in financing and wage costs in a context of low economic growth puts the construction, transportation, telecoms, machinery and equipment, retail, household equipment, electronics, automotive and textiles sectors particularly at risk.

To continue to grow while maintaining profitability and cash flow, companies will need to be extremely vigilant in 2023. In the current economic and geopolitical environment, non-payment risk is definitely on the rise, Lemerle concludes.

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