Allianz Trade Global Survey 2022 - What do exporters expect? And: 200bps more – will the Fed hike the economy into recession?

When everything seems to be going against you, it sometimes helps to remember that the airplane takes off against the wind, not with it. This week, we proudly present the first Allianz Trade Global Survey that takes the pulse of exporters’ expectations – both before and after the onset of the Ukraine invasion. In the US, a rapid hiking cycle could narrow the window for a “soft landing” as a slowing economy amid elevated energy prices makes a recession increasingly probable; we’ve looked at yield curve dynamics and the market indicators to keep an eye on. Plus a new episode of our Tomorrow podcast for you focusing on surging energy prices in Europe: Learn more on how long higher energy prices are likely to last, and which countries and sectors could be hit the hardest. And the link to a recent GDV panel with the chief economists of SwissRe, MunichRe, and Allianz.

And: Happy Easter holidays from us to you!

Allianz Trade Global Survey 2022

After the optimism of the global "grand reopening" last year, 2022 looks set to be much more of a rocky road for exporters as the invasion of Ukraine has hit business and consumer confidence, driven up commodity prices and extended supply-chain disruptions. In this context, we decided to check the pulse of nearly 3000 companies across the US, China, the UK, Germany, France and Italy. Two surveys were carried out: one before the Ukraine conflict, and one after.

Three trends stand out:

1. More businesses are bracing for a hit to turnovers in 2022. In the first round of our survey, just 6% of companies were worried about turnover dropping in 2022; now, the share has risen to 22%, mostly in the chemicals, energy & utilities and machinery & equipment sectors. To cope with the ongoing slowdown in demand, companies are planning to diversify export markets and increase investments in new markets, proving that export ambitions remain resilient. But the longer the conflict lasts, the greater the risk of the slowdown escalating into a full-fledged demand shock, which could push global trade into a severe recession.
2. The legacy of the Covid-19 era, state support is still viewed as the ultimate lifeline in crisis times. High energy prices, geopolitical tensions, increased transportation bottlenecks, sanctions against Russia and input shortages rank among the top concerns for companies. With the additional pressure of rising financing costs and currency risks, around half of the companies we surveyed believe financing support via state-guaranteed loans and direct subsidies would protect their businesses from the fallout of the war. However, in the absence of much more severe economic shock, we are unlikely to see the return of extensive “whatever it takes” policy support as seen during the Covid-19 crisis.
3. Non-payment risk is back. More than 40% of exporters expect payment terms to increase following the war and more than half expect a rise in non-payment risk in the next six to 12 months, compared to less than one third before the war. This confirms the normalization in business insolvencies that had already begun before the war, albeit still at a moderate pace. For the main European export markets, we expect insolvencies to rise by more than +10% in 2022.

The full white paper will be available to download from the Allianz Trade website from 21 April onwards; In the meantime, you can find the results in the presentation here.

200bps more - Will the Fed hike the economy into recession?

The flattening (and partially inverted) US yield curve is signaling rising recession fears. There are signs that a rapid hiking cycle could narrow the window for a “soft landing” as a slowing economy amid elevated energy prices makes a recession increasingly probable. Corporate earnings have already halved from the recent peaks while the credit impulse has turned negative as banks have begun tightening their lending standards.

However, the US economy has not reach an overheating phase (and growth is in fact slowing), with the policy rate still at record low levels. Corporate and household balance sheets have become less vulnerable to rising interest rates, thanks to rising cash buffers and lower leverage. But we believe the US Federal Reserve could raise the policy rate by not much more than 200bps without causing a recession, for instance, triggered by a collapse of the US housing market.

Under baseline conditions, long-term rates have little room to rise further but continued uncertainty about the economic outlook suggest a wait-and-see approach to potential buying opportunities. The recent shift of the yield curve dynamics to longer maturities suggests that 10-year US Treasury yield could soon test the 3%-mark but is likely to decline during the remainder of the year. While rising long-term yields has made an investment increasingly attractive, we believe it is still too early to enter into a position now. The re-steepening of the 2y10y spread on the 1y forward is the only one out of four market indicators for stabilizing long-term rates (and potential long positions) have been met so far. We have yet to see the following three other indicators to materialize:

• Topping out of the 10y10y forward swap (market proxy for the long-term equilibrium rate)
• Inversion of the 2y5y spread on the Treasury curve (signal of structural curve inversion)
• Inversion of the 2y10y real spread (signal for deteriorating economic outlook)

You will find our full report here.

Digital content

A fresh episode of our podcast ‘Tomorrow’: With energy prices surging in Europe, households and companies are feeling the pinch. In this episode, we speak with Ana Boata, Head of Economic Research at Allianz Trade, and Ano Kuhanathan, Head of Corporate Research, to find out how long higher energy prices are likely to last, and which countries and sectors could be hit the hardest.

Earlier this week, the chief economists of SwissRe, MunichRe and Allianz discussed the implications of the Ukraine invasion; the discussion was moderated by Joerg Asmussen, Director of the GDV, the trade association of the German insurance industry; the replay link can be found here (panel in German, 50’).