Global Economic Outlook with Focus on China and Chinese Insurance Market 3 rd International China Liability Regimes Conference 21 August 2013, Beijing Kurt Karl Swiss Re
Global economic outlook with focus on China and Chinese insurance market The 3rd International China Liability Regimes Conference Dr. Kurt Karl, Swiss Re Chief Economist Beijing, 21 August 2013 Swiss Re Economic Research & Consulting 1
Table of Contents Global outlook When will interest rates rise? Impacts of Euro zone crisis on Asian economies Impact of Fed Taper on Asian economies China's insurance outlook Conclusion Swiss Re Economic Research & Consulting 2
Global outlook Swiss Re Economic Research & Consulting 3
Global Outlook: modest growth, low interest rates and mild inflation Global growth is gradually accelerating this year The US expansion is expected to strengthen in 2013 and into 2014, driven by consumer spending, business investment and housing construction. Chinese growth expected to accelerate again in the second half of 2013, but only slightly. Emerging market economies are watching for the next US Central Bank move, but there is still some room for fiscal stimulus. Europe is in a mild recession which appears to be ending. Growth is hampered by fiscal austerity and tight credit conditions in the peripheral economies, but activity is slowly improving. Easy monetary conditions will continue: Yields on long-term government bonds will remain low, but are expected to continue rising, particularly next year. Inflation risks are well contained for now, but the long-term outlook is more uncertain. Central banks have the tools to control inflation, but they could potentially be constrained by the political need to reduce deficits (eg, Japan!). The top key risk that could derail global growth is a policy error in the Euro area. The risk of a fiscal policy error in the US is now unlikely. Other risks include Japan faltering, an oil price shock and a hard landing in China. Swiss Re Economic Research & Consulting 4
Economic indicators have been improving, but Euroland still lagging Purchasing Managers Indices, monthly data PMIs are survey based indicators. Values above 50 indicate economic expansion, values below 50 contraction Sources: Datastream, Bloomberg Swiss Re Economic Research & Consulting 5
Real growth in GDP is expected to improve into 2014 Real GDP growth, % 12 10 8 6 4 2 0-2 -4-6 -8 Emerging Asia Middle East Latin America Central & Eastern Europe Advanced markets Source: Swiss Re Economic Research & Consulting 2009 2010 2011 2012 2013 2014 Swiss Re Economic Research & Consulting 6
Three of the world s five largest economies will be in Asia by 2023 120 Australia GDP per capita in 2023 (USD thousand) 100 80 60 40 20 0 Japan Taiwan Singapore Hong Kong South Korea Malaysia Thailand Philippines Indonesia Vietnam China India (20) 1% 2% 3% 4% 5% 6% 7% 8% 9% Real GDP growth (2013-2023) Note: Size of the bubble represents nominal GDP (USD bn) in 2023. Sources: Oxford Economics, Swiss Re Economic Research & Consulting. Swiss Re Economic Research & Consulting 7
S&P 500: Not overvalued US deficit falling rapidly due to strong revenue growth, weak spending growth: Balanced by 2015 on present trends! 12-month moving average, % change y-o-y Clinton Bush Obama Recessions US recessions Sources: Datastream, Swiss Re Economic Research and Consulting; NBER Swiss Re Economic Research & Consulting 8
Recovery in housing market supports US economic upswing despite fiscal headwinds House starts in the US, millions Forecast US Recessions Forecast Sources: Datastream, Swiss Re Economic Research and Consulting, NBER Swiss Re Economic Research & Consulting 9
US housing prices have increased recently and even UK prices are now rising House prices, index (right axis) and %-change yoy (left axis), monthly data For the US the seasonally adjusted S&P/Case-Shiller 20-city composite index is shown. For the UK we show the Halifax all houses price index. Source: Datastream Swiss Re Economic Research & Consulting 10
When will interest rates rise? Swiss Re Economic Research & Consulting 11
S&P 500: Not overvalued When will the unemployment rate reach 6.5% in the US? Q1 2015? Earlier? US unemployment rate, % Recessions Q1 '15 Sources: Datastream, Swiss Re Economic Research and Consulting; NBER Swiss Re Economic Research & Consulting 12
ER&C interest rate forecast Fed begins hiking in 2015, reaches 1.75% on Fed funds rate by end-2015, 3% by end-2016. This is slower than in the glacially slow hiking of 2004-06, which helped cause a housing bubble, so this risk is rising The pace of rate hikes will depend on strength of economic growth and rate of inflation -- 2.5% inflation will certainly be tolerated 10-year T-note rises to 3.5% (end-2015), then 4.75% by end-2016 Total impact of Quantitative Easing and Treasury's on Fed's balance sheet lowers long-term rates in the US by about 50bp (ER&C estimate and also consensus from survey of literature). Tapering to start soon? Growth and expectation of Tapering has pushed up interest rates. Growth likely to be weak in Q3, so stable yields expected to end-2013. ECB rate hikes will probably lag the US due to the more sluggish recovery. BoE probably before ECB, while BoJ only begins hiking if inflation gets high Swiss Re Economic Research & Consulting 13
Impacts of Euro zone crisis on Asian economies Swiss Re Economic Research & Consulting 14
Impacts of Euro-crisis on Asian economies Trade Asia's export growth has decelerated since mid-2010, with exports to Eurozone underperforming. However, growth has shown mild rebound since late-2012 Asian trades with Eurozone is material but direct exposure to GIIPS are relatively small. Bank credits European banks remain a key provider of credit to most countries in Asia, and credit from European banks to Asia has not retreated post the crises Other international banks have aggressively increased their exposure to Asia Asian countries have adequate reserves to absorb external funding shocks Financial markets Asian equities have performed better than European stocks since early 2010 Volatility has increased partly because of uncertainty over US Fed Taper Increasing correlations between markets has made it more difficult for investors to diversify Swiss Re Economic Research & Consulting 15
Asia's export growth has decelerated since mid-2010, with exports to Eurozone underperforming 50% YoY growth of Asia exports 40% 30% 20% 10% 0% -10% -20% -30% -40% Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Total Asia exports Asia exports to Eurozone Note: calculation of Asia exports is based on exports from Australia, New Zealand, Japan, South Korea, China, Hong Kong, Macau, Taiwan, India, Bangladesh, Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam, Cambodia, Laos, Sri Lanka, Myanmar and Brunei. Source: CEIC, Swiss Re Economic Research & Consulting Swiss Re Economic Research & Consulting 16
European banks remain a key provider of credits to many Asian markets 900 (USD bn) Credit from overseas banks (2012) 800 700 600 500 400 300 200 100 0 Japan Hong Kong Australia China Singapore South Korea New Zealand India Malaysia Taiwan Indonesia Thailand Philippines Vietnam Credit from European banks Credit from non European banks Series3 Source: BIS, Swiss Re Economic Research & Consulting Swiss Re Economic Research & Consulting 17
European banks have not retreated from Asia; other international banks are expanding 4'500 4'000 3'500 3'000 2'500 2'000 1'500 1'000 (USD bn) Bank credit to Asia European banks Non-European banks 500 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Swiss Re Economic Research & Consulting 18 Q3 2008 Credit from European banks Credit from non European banks Total credit from overseas banks Note: calculation of bank credit to Asia is based on sum of overseas bank credit to Australia, New Zealand, Japan, South Korea, China, Hong Kong, Macau, Taiwan, India, Bangladesh, Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam, Cambodia, Laos, Sri Lanka, Myanmar and Brunei. Source: BIS, Swiss Re Economic Research & Consulting Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012
Most Asian countries have adequate reserves to absorb major funding shocks 140% Credit from European banks as % of FX and gold reserves (2012) 120% 100% Figures for Hong Kong and Singapore are distorted due to their status as international financial centers 80% 60% 40% 20% 0% Hong Kong Singapore India Vietnam Malaysia South Korea Indonesia Japan Philippines Taiwan Thailand China Source: BIS, CIA World Fact Book, Swiss Re Economic Research & Consulting Swiss Re Economic Research & Consulting 19
Fundamentals of Asian economies remain strong Country Policy Rate 2012 CPI Current account as % of GDP 2013 forecasts by IMF Government budget balance as % of GDP Government gross debt as % of GDP Australia 2.75% 1.7% -5.5% -1.0% 27.2% New Zealand2.50% 1.1% -5.9% -2.7% 38.1% Japan 0.10% 0.0% 2.3% -9.1% 245.0% South Korea 2.50% 2.4% 1.7% 2.7% 31.6% Hong Kong 0.23% (1-year exchange fund bill fixing) 4.0% 3.8% 2.1% 31.0% Taiwan 1.875% 1.2% 7.3% -3.1% 40.9% Singapore 0.18% (overnight repo rate) 4.6% 20.7% 5.1% 103.4% China Base 1-year deposit rate: 3.00%; base 1-year lending rate: 6.00% 2.7% 2.5% -1.0% 19.6% India Repo rate: 7.25%; reverse repo rate: 6.25% 8.5% -3.3% -9.1% 66.7% Indonesia 6.50% 4.3% -2.4% -2.0% 22.2% Malaysia 3.00% 1.6% 6.9% -4.3% 53.5% Thailand 2.50% 3.0% 0.1% -3.8% 46.2% Philippines Overnight borrowing rate: 3.50%; overnight lending rate: 5.50% 3.1% 2.6% -1.2% 39.7% Vietnam 9.00% (base interest rate) 9.2% -0.9% -3.4% 50.6% Source: IMF World Economics Outlook, central banks, Swiss Re Economic Research & Consulting Swiss Re Economic Research & Consulting 20
Impact of Fed Taper on Asian economies Swiss Re Economic Research & Consulting 21
Concerns of Fed Taper drove Asian government bond sell-off, aided by increased foreign holding 200 10-year local government bond yield: difference between 23 Jul 2013 and 02 May 2013 (in bps) 50% Foreign holding of local currency government bonds (as % of outstanding bonds) 160 40% 120 30% 80 20% 40 10% 0 Indonesia Hong Kong Singapore New Zealand South Korea Australia Philippines Malaysia India Thailand Taiwan China Japan 0% Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 South Korea Thailand Malaysia Indonesia Sources: Bloomberg, CEIC, OBSL, Indonesia Debt Management Office, Swiss Re Economic Research & Consulting Swiss Re Economic Research & Consulting 22
Countries with current account problems and/or exposure to large portfolio inflows are more vulnerable 35% 30% 25% Current account + net FDI inflow as % of GDP 25% 20% Portfolio inflows as % of GDP (2011 Q1 2013) 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% India Indonesia Thailand South Korea Philippines Malaysia China Taiwan Vietnam Singapore 2007 2012 Source: CEIC, Haver, IMF, BNM, Swiss Re Economic Research & Consulting -5% Hong Kong Malaysia Thailand South Korea Philippines Indonesia India China Vietnam Singapore Taiwan No breakdown/total portfolio inflow Equity Debt Swiss Re Economic Research & Consulting 23
Asian central banks can keep policy rates low and let exchange rates depreciate, given benign inflation 30% 25% Consumer price inflation remains benign in most Asian countries 140 Most Asian currencies have weakened against USD (01 Jul 2011 = 100, above 100 means depreciation) 20% 130 15% 10% 120 5% 110 0% -5% Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 South Korea India Malaysia Philippines China Indonesia Thailand Vietnam 100 90 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 AUD KRW JPY SGD CNY INR IDR MYR THB Jul-13 Source: CEIC, Bloomberg, Swiss Re Economic Research & Consulting Swiss Re Economic Research & Consulting 24
China's insurance outlook Swiss Re Economic Research & Consulting 25
Non-life insurance premiums and real growth rates (2007-2023, %) 35% 30% 25% 20% Forecasts 2 500 2 000 1 500 15% 10% 5% 1 000 500 0% 2007 2009 2011 2013 2015 2017 2019 2021 2023 0 Premiums, CNY bn (RHS) Real growth rate Swiss Re Economic Research & Consulting 26
Achieving CIRC's 12 th FYP targets? Actual Actual 12 th FYP 2010 Insurance penetration: 3.6% Insurance density: per capita CNY 1 072 Premium income: CNY 1.45 trillion Total assets: CNY 5 trillion 2012 Insurance penetration: 3% Insurance density: per capita CNY 1 129 Premium income: CNY 1.6 trillion Total assets: CNY 7.4 trillion 2015 Insurance penetration: 5% Insurance density: per capita CNY 2 100 Premium income: CNY 3 trillion Total assets: CNY 10 trillion CAGR 11% CAGR 23% Swiss Re Economic Research & Consulting 27
Market Outlook Non-life insurance demand will continue to derive support from A strong infrastructure pipeline Urbanisation, motorisation and industrialisation Rising nat cat risk awareness Life & health insurance demand is recovering, supported by Further increase in household income Increasing demand for health and medical products Increasing attention paid to retirement market More interest in strengthening capital base (partly in expectation of tighter solvency standards) Primary insurers shifting from focusing on market-share to profitability Swiss Re Economic Research & Consulting 28
Challenges ahead: more competition introduced into the market Non-life: The opening to foreign insurers of motor compulsory liability insurance On-going motor tariff liberalization is expected to allow more freedom in pricing and squeeze on insurers' profitability L&H: The cap on interest rates (2.5%) for standard life insurance products will be scrapped, paving the way for more competition in the market Interest rate liberalization in China will intensify competition for household savings business and put pressure on life insurance products Swiss Re Economic Research & Consulting 29
China P&C market: business split China: P&C premium mix in 2011 Agricultural 4% Credit 2% Liability 3% Others 11% Commercial Property 7% Motor Vehicle 73% Motor business dominates the P&C portfolio. Over 70% of P&C premium comes from Motor for most domestic players. The ratio is even higher for medium/small domestic P&C insurance companies Swiss Re Economic Research & Consulting 30 Source: CIRC website; companies' annual reports and info. disclosure reports; online news
New targets beyond GDP growth Imminent opportunities for casualty insurance Housing target: Develop 36 million units of affordable housing Two new pollution targets: Nitrogen oxide: 10% reduction Ammonia nitrogen: 10% reduction Wellbeing target Increase average life expectancy by one year to 74.5-year-old Innovation target 3.3 patents per 10,000 people Education target Increase high school enrolment ratio from 82.5% to 87% China's national 12 th FYP Source: KMPG, SR ER&C Swiss Re Economic Research & Consulting 31
Major drivers behind increasing casualty insurance demand in China 1 Economic growth and rebalancing towards domestic consumption increasing consumerism 2 3 Urbanisation is supporting further motorisation in China benefit to motor liability classes Regulatory changes (eg Tort Reform in 2009 extending the scope on which strict liability applies) 4 Requirement of liability insurance for high-risk industries in Beijing sets an example for other cities to follow Swiss Re Economic Research & Consulting 32
Urbanisation will support increasing car ownership in China, and drive motor insurance growth 250 Passenger cars per 1000 inhabitants 200 Beijing 150 Shanghai 100 Tianjin 50 0 20 30 40 50 60 70 80 90 100 Urbanisation rate, % Note: Each marker represents one individual region in China based on 2011 data. The red trend line is fitted to illustrate correlation between urbanisation and car ownership. Sources: China Statistical Yearbook; Swiss Re Economic Research & Consulting. Compulsory third party liability Introduced on 1 July 2006 Limits were increased and premium rates lowered on 1 Feb 2008 Swiss Re Economic Research & Consulting 33
Conclusion Swiss Re Economic Research & Consulting 34
Conclusion Global growth will gradually improve this year into next The major Central Banks will likely be raising interest rates by early 2015 Euro zone crisis is slowing growth in Asian economies, but not leading to significant problems Fed Tapering will raise borrowing costs in Asian economies China's economy remains resilient with growth stabilizing at 7-7.5% over the coming years. Chinese P&C market is expected to grow robustly at over 10% in short-term (after inflation) Casualty lines will have many growth opportunities Motor insurance in the short term New areas will stem from pollution issues, urbanisation, rising concerns about food safety, and changes in the regulatory and legal environment Swiss Re Economic Research & Consulting 35
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