The global economic outlook,
with focus on US and Canada
Kurt Karl
Swiss Re
CIA
Conference
Toronto
Sept. 2009
Global economic outlook: Overview
Swiss Re
Economic Research
& Consulting
Slide 1
The outlook
What is driving the recovery?
What happens to assets and inflation in a
recovery?
Risks to the outlook
Summary of the economic landscape
Impact on insurance industry
Global overview:
Weak recovery in 2010
2007
2008
2009F
2010F
Euroland
UK
2.7
3.1
0.6
0.7
-4.2
-4.5
0.6
0.6
Japan
Canada
2.4
2.5
-0.7
0.4
-5.5
-2.6
1.3
2.0
Euroland
2.1
3.3
0.5
1.1
UK
Japan
Canada
2.3
0.1
2.1
3.6
1.4
2.4
1.8
-1.3
0.0
1.3
0.4
1.0
Euroland
4.00
2.50
1.00
1.25
UK
Japan
Canada
Yields 10-yr govt bond (eop)
Euroland
UK
Japan
Canada
Sources: Swiss Re
Economic Research &
Consulting
5.50
0.46
4.25
2.00
0.10
1.50
0.50
0.05
0.25
0.75
0.50
1.50
4.3
4.5
1.5
4.0
2.9
3.1
1.2
2.7
3.5
3.8
1.2
3.5
4.2
4.4
1.5
4.2
Real GDP growth
Inflation
Policy rates (eop)
Swiss Re
Economic Research
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Slide 2
U.S. Economic Outlook:
Key country for global recovery
2007
2008
2009F 2010F 2011F
Real GDP
Consensus
2.1
2.1
0.4
0.4
-2.7
-2.6
2.0
2.3
3.0
n/a
CPI
Core CPI
End-of-Period:
Fed Funds
5-yr T-note
10-yr T-note
2.9
2.3
3.8
2.3
-0.5
1.6
1.3
1.3
1.6
1.7
4.25
3.5
4.0
0.25
1.6
2.3
0.25
2.7
3.6
1.0
3.4
4.3
4.0
4.7
5.0
206
492
225
175
160
Annual Averages:
Baa bond, spread,
bp
Swiss Re
Economic Research
& Consulting
Slide 3
Sources: Blue Chips Economic Indicators, Moody’s, Federal Reserve Board, Swiss Re ER&C
What is driving the recovery?
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Economic Research
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Slide 4
Substantial Central Bank easing, low interest rates
Fiscal stimulus
Lower oil/commodity prices, reduced inflation
Inventories low, production now increasing
Global markets improving, exports rising
Cost reductions profits up, investment returns
Need US consumer for sustainability
Tensions in the money
markets have eased
3m Libor – 3m overnight index swap
400
basis
points
350
Value as of 02 Sep 09
Euroland: 38.9
US: 15.7
UK: 32.7
300
250
200
150
100
50
0
Oct 07
Jan 08
Apr 08
Jul 08
US
Slide 5
Oct 08
Euroland
Jan 09
UK
Apr 09
Jul 09
Source: Bloomberg
Monetary policy is highly
accommodative
Percent
10
9
8
7
6
5
4
3
Canada
US
ECB
2
1
0
88
90
92
94
96
98
00
02
04
Swiss Re
Economic Research
& Consulting
Slide 6
Source: Federal Reserve Board, Bank of Canada, European Central Bank
06
08
House prices have rebounded
in US and UK …
House prices, %-change year-on-year
40%
Value as of 31 Jul 09
US: -15.1%*
UK: -9.9%
30%
20%
10%
0%
-10%
-20%
1991
1993
1995
1997
US S&P/ Case Shiller
Swiss Re
Economic Research
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Slide 7
1999
2001
2003
2005
2007
2009
UK Halifax
* as of 30. Jun 09
Source: Bloomberg
…but not in Canada
Percent
change
year ago
20
15
10
5
0
-5
-10
Canada
-15
US
-20
88
90
92
94
96
98
00
02
04
06
08
Swiss Re
Economic Research
& Consulting
Slide 8
Source: National Association of Realtors (US) 3- month moving average, Statistics Canada
Canadian housing starts,
not a big bubble, but a big bust
Thousands,
3-mo. moving average
260
240
220
200
180
160
140
120
Housing starts
100
Swiss Re
Economic Research
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Slide 9
88
90
92
94
96
98
00
Source: Canadian Mortgage and Housing Corporation
02
04
06
08
US housing starts,
weak recovery
Thousands,
3-mo. moving average
2400
2000
1600
1200
800
Housing starts
400
Swiss Re
Economic Research
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Slide 10
88
90
92
Source: US Dept of Commerce
94
96
98
00
02
04
06
08
Manufacturing survey
continues to improve
Purchasing Managers Indices
65
Index
60
55
50
45
Value as of 31. Aug 09
US: 52.9
Euro area: 48.2
UK: 49.7
Japan: 53.6
40
35
30
1998
Swiss Re
Economic Research
& Consulting
1999
2000
2001
2002
United States
2003
2004
Euro area
2005
2006
United Kingdom
2007
2008
2009
Japan
Source: Bloomberg
Slide 11
Manufacturing: Purchasing managers
index
Above 50 is expanding
70
65
60
55
50
45
40
35
50
US
Canada
30
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Institute for Supply Management, Richard Ivey School of Business (3-mo. mov. avg.)
Slide 12
Euro area business sentiment
has rebounded
Euro area GDP growth (pct chg year-on-year) and business sentiment
6
Value as of Jun 09
GDP: -4.7
Value as of Aug 09
Indicator: -2.2
Swiss Re
Economic Research
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Slide 13
percent
Index
2
4
1
2
0
0
-1
-2
-2
-4
-3
-6
Jan 96
-4
Jan 98
Jan 00
real GDP growth
Jan 02
Jan 04
Jan 06
Jan 08
Business Climate Indicator (rhs)
Source: Bloomberg, European Commission
UK leading indicator has
recovered somewhat
GDP growth (pct chg year-on-year) and business sentiment (pct chg
year-on-year)
6
Value as of Jun 09
GDP: -5.5
Value as of Jun 09
Indicator: -7.4
percent
Index
10
4
5
2
0
0
-5
-2
-10
-4
-15
-6
-20
-8
-25
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Swiss Re
Economic Research
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real GDP growth
Leading Economic Indicator (rhs)
Source: Bloomberg, Conference Board
Slide 14
Key to global recovery:
US consumer spending is still weak
Percent change year ago,
3-mo. moving average
7
6
5
4
3
2
1
0
-1
Real Consumption
Real disp. Income
-2
-3
Swiss Re
Economic Research
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Slide 15
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Bureau of Economic Analysis
Real retail sales: US and Canada
Percent change year ago
10
5
0
-5
-10
US
Canada
-15
Swiss Re
Economic Research
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Slide 16
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: US Dept. of Commerce, Statistics Canada
What happens to assets and
inflation in the recovery?
Temporary investment opportunities: Credit and
equities
– Late in recession, early recovery
Government bond yields likely to remain low
– But likely to rise in 2010, 2011
Risk of inflation rises after 2010, low inflation now
– Risk is low through end-2010, may not be a problem until
2012 or later
– Fiscal/monetary restraint will keep growth moderate
Swiss Re
Economic Research
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Slide 17
– Central banks are familiar with how to tighten monetary
policy
– Risk is essentially political
Credit spreads rise into, then fall
after a recession
Spread of Baa to 20-year T-bond, quarterly avg
5
4
Spread, %
3
2
1
0
59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07
Slide 18
Source: Moody’s, Federal Reserve Board, NBER, SR Economic Research & Consulting
S&P 500, Forward P/E ratio:
Close to fair valuation
12-Month Forward P/E Ratio
30
25
20
15
10
5
Forward P/E
Avg. since '79
0
79
Slide 19
82
85
Source: Standard & Poor’s
88
91
94
97
00
03
06
09
S&P/TSX 60, P/E ratio:
Close to fair valuation
P/E Ratio, Composite 60, S&P/TSX
20
18
16
14
12
10
P/E
Avg. since '01
8
01
Slide 20
02
03
Source: Standard & Poor’s
04
05
06
07
08
09
Long-term bond yields:
mostly up from here
10 yr long-term bond yields (since 1988), monthly data
14
12
10
8
6
4
Canada
US
2
0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: EcoWin
Slide 21
Inflation rises into a recession,
then falls, rates follow
Inflation is
year-over-year
rate
Percent
US All-items CPI and yield on 10-yr
Treasury note
16
14
12
10
8
6
4
2
0
-2
Swiss Re
Economic Research
& Consulting
Slide 22
59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07
T-note
CPI
Source: Bureau of Labor Statistics, NBER, SR Economic Research & Consulting
Long-term inflation expectations
appear well-contained
Break-even Inflation, 10yr Bonds
percent
4.5
4.0
3.5
3.0
2.5
2.0
1.5
Value as of 31 Aug 09
US: 1.7
UK: 2.3
1.0
0.5
0.0
00
02
04
US
Slide 23
06
08
UK
Source: Bloomberg
Oil prices down, better for consumers,
but not Canadian GDP
West Texas Intermediate, $bbl, and real 2000 dollars, bbl
160
140
WTI
Real
120
100
80
60
40
20
0
78
Swiss Re
Economic Research
& Consulting
Slide 24
81
84
87
90
93
96
99
02
Source: Bureau of Labor Statistics (BLS), Federal Reserve Board of St. Louis
05
08
Lower oil prices: Inflation turns
to deflation, but this will reverse this year
Percent change year ago
7
6
5
4
3
2
1
0
US
-1
Canada
-2
Swiss Re
Economic Research
& Consulting
Slide 25
88
90
92
94
96
98
Source: Bureau of Labor Statistics, Statistics Canada
00
02
04
06
08
Risks to the outlook
Swiss Re
Economic Research
& Consulting
Slide 26
“Another bout of weakness” (25%)
Negative growth in 2010 from steep employment declines,
consumers can’t come back
Credit crisis is more severe than currently anticipated,
prolonging and deepening the recession
Pandemic is more severe than expected?
Upside risk – US begins a V recovery = strong global
growth in 2010-11 (15%) due to:
Fiscal/monetary stimulus
Low inflation, low interest rates
Housing/vehicle replacement boom
Summary
Swiss Re
Economic Research
& Consulting
Slide 27
Monetary/fiscal stimulus, low commodity prices and lean
inventories boost growth sustaining recovery
Fiscal/monetary restraint after 2010 moderates growth
Consumer and business loans strained through 2011, also
implies a weak recovery
Inflation remains low
Yield on Canadian government bonds low until further
notice – 3.5% end of 2009, 4.2% at end 2010; 4.5 – 5.0%
thereafter. Similar in US, Euroland and UK
Equity and bond markets continue to recover
Market volatility continues into 2010 due to uncertainty
about strength of recovery
Canada life market trends
Slide 28
The financial crisis has strained Canadian life companies, particularly
those with large asset management operations.
Still, Canada’s economy has been less affected than other countries.
Due to conservative regulatory standards and practices, its life insurers
suffered fewer investment losses than their US counterparts.
Life companies issued debt and equity this year to replenish capital,
keeping their capital ratios well above regulatory and company target
minimums.
This year, economic and financial headwinds will continue to pressure
operating margins, due to investment losses, lower fee revenue from
assets under management, low government bond yields, higher funding
costs, reduced access to funding, higher hedging costs, and weakened
demand for new business.
In line with the sluggish economy, our forecast of inflation-adjusted L&H
premium growth is: - 5% in 2009, 2% in 2010 and 4% in 2011 and
beyond.
Despite its challenges, the industry remains well financed and its
outlook is improving.
Canadian P&C insurance
Recession has lowered investment yields (4% in 2008 and
2009), but there has only been a slight erosion in capital
– Low government bond yields will continue to put
pressure on investment returns
– Annual average ROE: 8% 2008, down to 5% 2009
Direct premiums written expected to be up about 2% in
2009
– Weak economic growth is reducing premium growth
as companies increase the retention of their risks
Combined ratio likely to rise to 103% in 2009 from 100%
in 2008
– Property and motor loss ratios are increasing
Swiss Re
Economic Research
& Consulting
Slide 29
Questions?
To be put on the e-mail distribution list for Swiss Re’s
US and Canadian Economic Outlooks contact:
kurt karl@swissre.com
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Slide 30
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