Inflation and what insurance investors need to consider

Gilles Moëc, Chief Economist, AXA Group, discusses his views on the ongoing issues with the high inflation rate and other risks to economic growth.

Insurance Investor Editorposted on Wednesday, September 07, 2022

Gilles Moëc, Chief Economist, AXA Group.

The state of economic matters in Europe in 2022 has been complicated with the end of lockdowns and the invasion of Ukraine, which have both caused and exacerbated supply chain issues as well as economic trends around consumer spending and employment.

All of this has created a perfect storm, argued some, but others were keen to look to the horizon to see what was coming down the pipeline next, including Gilles Moëc, Chief Economist, AXA Group, who also said China-US relations needed to be monitored closely.

However, inflation was the key concern for many in the economy. According to the most recent numbers available, EU inflation was at 9.8% in July, up from 9.6% in June.

Inflation in the Eurozone is provisionally estimated as 9.1% in August, up from 8.9% in July. This is a record high. Inflation was 3.0% in August 2021.

“My concern is trade war 2.0. We have been quite lucky, as before the pandemic, we were obsessed with this and rightly so.”

In a recent Clear Path Analysis report, Investing in Fixed Income Europe 2022, industry leaders from organisations including Pictet Asset Management, Janus Henderson and Pensions Policy Institute gave their thoughts on how the private markets investment needs to respond to inflation, interest rates, and the economic outlook going forward.

One such area was the areas we should be looking out for next, which was part of a discussion on inflation and the economy.

“My concern is trade war 2.0.,” said Moëc. “We have been quite lucky, as before the pandemic, we were obsessed with this and rightly so,” he explained and added that when discussed in the context of deglobalisation he was worried about the possibility that Europe’s economy would end up not in complete deglobalisation, but a division of the world in two spheres.

The prospect of a second trade war between the two superpowers has been exacerbated by their divergent reactions to Russia’s invasion of Ukraine and the issue of Taiwan. The latter issue flared up over the summer with US House Speaker Nancy Pelosi visiting the breakaway island.

However, some believe that the high inflation could be a good thing for averting a second trade war due to both economies focused on keeping themselves in positive territory.

"If we decide that we can do without, or that for some reasons we don’t want to use Chinese supply for political reasons, then yes, we would end up with a structural bottleneck in the system and it would take time to build capacity."

Moëc said these spheres would be a Chinese-dominated one and a US-dominated one, which would reduce the capacity to allocate demand across various supply centres. This, he added, was “really crucial because in 2020 the bilateral deficits between the advanced economies and China rose massively.”

He explained that this is partly because the developed world uses China as the producer of last resort. “If we decide that we can do without, or that for some reasons we don’t want to use Chinese supply for political reasons, then yes, we would end up with a structural bottleneck in the system and it would take time to build capacity,” he said. “This would recreate tension between China and the US, which would make me nervous.”

All of these factors could see investment portfolios look very different in 2023 for insurers.

To read the interview in full, and the rest of the report, please click here.

 

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