3rd July 2022

S&P Global Ratings: European growth to worsen into 2023, insurance holding up amid highly challenging conditions

S&P Global Ratings has published its Q3 Credit Conditions report, analysing key risks facing the European economy.
The report predicts an increasingly challenging outlook for credit quality in Europe, owing to the rapid deterioration in global macroeconomic conditions, causing high inflation, market volatility, and rising yields, ongoing geopolitical uncertainty and lingering COVID-19 lockdowns in China.
The report further finds that Europe’s insurance sector is holding up despite headwinds. Rising interest rates will have a positive effect by widening investment margins over the long run, particularly for life insurers. This should dampen the negative impact from unexpected inflation for non-life insurers.
However, following the invasion of Ukraine, over 500 planes remain grounded in Russia, and this situation may lead to material insurance claims in specialty lines, such as political risk, war, all risk cover, and aviation, although claims would likely take a long time to be settled.
Key risks include:
-A rapid adjustment of central bank policy rates to counter excessive inflationary pressures
-Stagnant growth impacting the operating environment and financial performance of corporates. Economic recovery and ongoing extraordinary monetary and fiscal stimulus risks creating complacency about the enormous step-up in corporate and sovereign debt over the last 18 months.
-Political considerations could also impede and delay the budgetary tightening required to maintain sovereign credit quality and restore the fiscal headroom necessary to fight an incoming financial shock.
-Tightening financing conditions reawakening fears over fragmentation within the eurozone
Credit ratings are likely to come under more pressure in 2023, according to the report, as supply constraints keep food and energy prices at elevated levels, households increasingly struggle with falling real incomes, and central banks prioritise inflation over growth. Default rates are expected to increase by 3% by year-end and into the first quarter of 2023.

S&P Global Trends(551 articles)