Economic growth in the eurozone was driven in 2016 by a stable, resilient expansion of domestic demand. In the fourth year after the euro crisis of 2011–2012, the total gross domestic product (GDP) grew last year by 1.7 per cent, after gains of 2.0 per cent were reported in 2015. Early indicators at the turn of the year also suggested a positive start to 2017. However, quite positive economic development in 2016 was overshadowed by major political events in June, such as the United Kingdom’s landmark decision to leave the European Union. Despite devaluation of the British pound, there has not yet been an economic downturn in the United Kingdom. The rejection of voting reform in Italy in a referendum held in December 2016 led to a regime change in Italy, yet did not lead to a political or economic crisis. Nevertheless, the Italian economy lagged behind general expectations and the entire eurozone with about 0.9 per cent economic growth.
The recovery in Austria, however, gained momentum last year. Real GDP growth accelerated year-on-year to 1.5 per cent. Rising fixed asset investments underscored an improvement in mood and future expectations among Austrian businesses. Furthermore, general demand is being supported, at least temporarily, by positive effects emanating from tax reforms. Nonetheless, the unemployment rate in 2016 climbed again to an average of 6.0 per cent (Eurostat). In contrast, the unemployment rate in the eurozone experienced a downward trend, but remained at a significantly higher 10.0 per cent on average.
The inflation rate in the eurozone in 2016 stood at an average of 0.2 per cent, however, towards the end of the year it increased again primarily due to volatility in the energy price index. The European Central Bank’s (ECB) expansive monetary policy was able to prevent a deflationary phase from taking hold. Still, considerations of the negative side effects of expansive monetary policy – such as increasing difficulties with private pensions, the formation of new asset bubbles, or the postponement of economic reforms – as pointed out by the German Council of Experts, for example, is strengthening public discussion. Although the core inflation rate remains far below the ECB inflation target, forecasts indicate higher price increases – and, as a consequence, a slight relaxation of the low-interest phase – in the coming years. In December 2016, as part of its slow interest rate increase programme, the US Federal Reserve (“the Fed”) enacted a second base rate increase of 25 basis points since December 2015, from a range of 0.5 to 0.75 per cent.
Central and Eastern Europe (CEE) reported generally positive macroeconomic conditions in the past year, and the GDP in those countries in which UNIQA does business saw a rise on average of about 2.8 per cent, excluding Russia. Longer-term growth forecasts also show an annual difference in growth between CEE and Western Europe of up to +1.5 per cent. One may therefore expect that the convergence processes in these countries will continue, even if at a slower speed than before the financial crisis. In general, the recovery in the region has been supported by solid domestic demand and moderate growth in per capita income. An improvement in mood among consumers and companies, recovery in a few local credit markets, and growth in new vehicle registrations are just a few of the factors that are supporting the overall catching-up process, especially in the last year, in the Eastern European insurance markets.
In Central Europe (Poland, Slovakia, Czech Republic and Hungary), economic growth last year was about 2.5 per cent. In part, interruptions in the demand for funds from the EU cohesion and structural funds, which appeared in the course of converting to the new budget cycle (2014–2020), led to lower fixed asset investments. Economists now expect a normalisation of financial flows from EU funding sources so that growth rates will again approach the region’s potential (about 3.0 per cent annually). The unemployment rates are sinking to levels (an average of 5.9 per cent) that were last recorded before the financial crisis (2008–2009). After somewhat deflationary trends, consumer prices appear to be normalising again since the beginning of 2017.
In the Ukraine, macroeconomic development and the banking sector have largely stabilised and, surprisingly, the economy was able to finish out with slight GDP growth in 2016. Russia’s economy is also slowly working its way out of a recession. Rising crude oil prices and currency stabilisation are having a positive effect, while the recovery of private demand is still lagging. Driven by such factors as one-time fiscal effects, Romania attained one of the highest GDP growth rates in 2016, anticipated at 4.8 per cent.
Southeastern Europe also recorded an increase in economic activity in 2016, with GDP growth at an average of 2.8 per cent. Recovery in the larger countries in the region (Bulgaria, Croatia and Serbia) is gaining momentum, while economic development in the southwestern Balkan countries is being supported by public investment projects, the construction sector and growth in the tourism industry.
In general, 2017 saw a continuation of the good overall economic environment in CEE. Central Europe’s GDP growth should come close to the 3 per cent mark again, while the recovery in the Ukraine and Russia will continue after their deep recession. Moreover, economists are expecting a stable price environment and continuing positive trends on the labour markets.