The global economy slowed in 2019 and is now growing at below trend. According to investment consultancy Mercer, this is mainly due to the slowdown in capital spending as the US-China trade war introduced significant uncertainty to business decision-making.

The slowdown was also driven by the lagged effects from tighter financial conditions in 2018, the firm stated in its Economic Outlook 2020.

Mercer expects the global economy to recover from below-trend growth rates to around trend as manufacturing picks up a bit and easier monetary policy begins to feed through, provided the US-China trade war doesn’t escalate and global labor markets continue to be strong.

Within the pickup in global growth, the firm expects emerging economies to do slightly better than the developed world. It also expects the US economy to continue to do well, growing at close to trend.

Mercer doubts, however, that the labor market can improve much further and expects the unemployment rate to stabilize below 4%. That should continue to apply moderate upward pressure on wages, which should support household income growth and consumer confidence — a crucial factor in economic growth.

If, as Mercer expects, the trade war doesn’t escalate further, there should be a pickup in business confidence. However, for that to lead to much higher capital spending, there would need to be an improvement in company profit margins, which have been under both internal (wages) and external (trade) pressures.

In Europe and Japan, Mercer expects economic growth to recover on the back of the strength in labor market and consumer balance sheets as well as external factors, such as a pickup in global trade activity.

The outlook for China may be improving, as both the central bank and the government are taking measures to stimulate the economy and reverse earlier efforts to restrict credit growth. Thus far, China has been less aggressive in stimulating the economy than it was in 2016, and whether they will do something on a larger scale remains to be seen.

Most of the emerging world is showing broadly sound economic fundamentals; however, the trade-war narrative and the extent of the China stimulus are likely to be the ultimate deciders of whether the emerging economies move back to trend (and perhaps above) or stay at weaker levels.

 

LCP predicts annual volumes of £30bn in de-risking market

Recent findings from pensions consultancy Lane Clark and Peacock (LCP) suggest that insurance capacity is likely to be able to accommodate £30bn (€35.4bn) of future annual volumes at attractive pricing levels for pension schemes, with the ability to flex up to £40bn as required.

Findings from a recent survey indicate that 2020 will see continued demand for buy-ins and buyouts as more defined benefit (DB) pension schemes reach maturity and insurer appetite remains high.

According to Willis Towers Watson (WTW), the bulk annuity market is set to return to ‘normal’ levels in 2020 with £30bn worth of deals expected over the course of the year. However, the firm has previosuly anticipated a higher volume – £40bn – in 2019.

The firm said that “next year should see a more balanced market, allowing greater traction for smaller schemes and fewer ‘mega deals’”. WTW expects macro conditions to drive market volatility, and this may lead to opportunities for attractive pricing.

The consultancy expects a particularly busy start to 2020, as those schemes that weren’t able to secure deals in 2019 seek to lock down risk.

Myles Pink, partner at LCP, said: “Insurance appetite looks strong in the mid-term, and annual volumes of £30bn in the de-risking market could be the new normal for the market. Demand will remain high as more pension schemes approach maturity and are successful in reaching their long-term funding target.”

Other predictions by LCP for 2020 and beyond include:

  • A higher number of smaller transactions is expected in 2020. In 2019, more than 75% of total volumes was accounted for by 11 transactions. There is expected to be around 10 transactions covering a total of £15bn in 2020, leaving more capacity for buyouts and buy-ins covering liabilities in the range of £250m and £1bn, respectively.
  • Over the next 15 years, almost £800bn of liabilities are expected to line-up for transfer to the insurance market.
  • Momentum in the longevity swap market will continue into 2020. Volumes are already expected to have reached £15bn in 2019, and could reach £10-15bn in 2020.

LCP’s recent survey showed that 57% of attendees said the long-term objective for their pension scheme is to buy out with an insurer. This compares with 40% of respondents answering the same question last year.

Pink added: “2019 was a record-breaking year not only in volume, but also in the execution of 11 transactions covering in excess of £1bn of liabilities. We expect 2020 to see a greater mix of transactions, with fewer high-profile deals and an opportunity for smaller transactions to complete.”

Ian Aley, head of WTW’s transactions team, agreed. He said: “[2019] has seen a remarkable number of mega deals, so although we expect a reduction in the number of large deals through 2020, there is certainly lots of ‘pent up’ demand in both the longevity swap and bulk annuity markets.”

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