Swiss Re Sees U.S. Economy Strengthening

May 20, 2004

Swiss Re’s seventh survey of economists’ opinions of the U.S. economy found that there is far less concern over drastic declines in equity markets and the value of the dollar, but fears of inflationary pressures are increasing.

The “Risk Survey,” conducted in April, compared the results with those in the last study in October. Thomas Hess, Head of Economic Research, Swiss Re commented: “The risk of a major economic disruption is waning as the U.S. and Eurozone economies continue to strengthen. However, the risk of higher U.S. medium term inflation and, hence, higher interest rates is rising, providing better investment opportunities for insurers over the next couple of years.”

According to 50 economists surveyed by Swiss Re in April, the risk of a stock market crash has decreased both in the U.S. and Europe over the last six months. They indicated that the probability of a stock market crash in 2004 – defined as a 25 percent decline in a major stock market index – is around 11 percent both for the US (down from 13 percent in October) and Europe (down from 16 percent in October). The likelihood of a persistent bear market from 2004 through 2013 – the market not recovering to 2003 year-end levels until after 2013 – was around 5 percent both in Europe and the U.S.

In comparison to the previous survey, the long-term risks for stock markets have increased slightly for the U.S. market (up from 3 percent in the previous survey) and remained about the same for Europe.

Swiss Re also found that “concern about a potential devaluation of the U.S. dollar is also falling. The economists indicated that the likelihood of the U.S. dollar declining by 60 percent against the Euro over next three years is 9 percent, down from 12 percent in the previous survey), while the estimated probability of the Euro losing 60 percent of its value in comparison to the U.S. dollar is around 5 percent, the same as in the October survey.”

Consistent with the strength shown by the U.S. economy over the past few months, the survey respondents gave a probability of 72 percent for U.S. growth exceeding 3 percent this year. For Europe, respondents gave a 76 percent probability of growth being above 0 percent but below the trend growth of about 2 percent.

The possibility of higher medium term inflation in the U.S. has increased over the past six months. According to the respondents, the likelihood that the U.S. economy experiences average CPI inflation of 4.5 percent or more for the next three years is 8 percent (up from 6 percent in the October survey), while in Europe it is 3 percent (down from 4 percent.

The participants in the April survey considered the risk of deflation to be small. Respondents rated the risk of falling prices over the next five years to be around 3 percent both in the U.S. and Europe. The likelihood of a period of However, they also found that “very low inflation has declined over the last six months. Inflation below 1 percent in the short term has a probability of 9 percent for the U.S. and 11percent for Europe. In the previous survey estimates were 14 percent for the U.S. and 15 percent for Europe.”

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