The current global political and economic environment is dominated, to a large extent, by how governments and central banks drive economies out of recession by stimulating growth, while reducing unsustainably high debt levels. In the UK:
- Growth has been much weaker than most commentators expected
- Unemployment, of almost 8%, is markedly higher than before the crisis
- Inflation, despite falling from 5% in October 2011 to around 2.5% today, remains above the 2% target
- Living standards have been squeezed for longer than at any time in living memory, with the real value of wages falling by 3% over the last three years, taking earnings back to 2003 levels.
Whilst the recession and resulting austerity create a tough environment, they have also given us some advantages, including a greater need for risk sharing by helping pension schemes de-risk their liabilities, providing guaranteed retirement income for pensioners and providing affordable protection plans for companies and individuals.
We also believe that we have an important role to play in helping governments manage central spending budgets through greater take-up of products that provide protection for people who might otherwise have to rely on state benefits.
Recent announcements on the introduction of a simplified single state pension in 2017 could mean that consumers now have greater incentives to save for retirement, knowing that the level of private pensions will not affect their entitlement to state benefits. In the same way, the government’s reform of unemployment and disability benefits may encourage individuals to consider private income protection cover.
The global economy has managed to muddle through significant challenges over the past 12 months. But there has been a stark divergence in performance between advanced and developing economies. Demand in advanced economies has barely grown – with the euro area particularly weak, reflecting concerns about the solvency of several member states. But demand in emerging economies continued to grow rapidly in the year as a whole. Given emerging economies are far more important today than a few years ago (almost 40% of global demand in 2011 compared with 25% in 2004), global growth was only slightly below its long-run average of 3% last year.
World trade and industrial production stalled last summer, partly reflecting concerns about the future of the euro, but also the delayed effect of previous policy tightening in emerging economies to combat inflation pressures. A combination of the European Central Bank’s president promising to do ‘whatever it takes’ to save the euro, and policy easing in emerging economies, led to a recovery in industrial confidence by the end of the year.