The downturn that started in the USA has been intensified by the crisis on the international financial markets

The downturn that started in the USA has been intensified by the crisis on the international financial markets and now encompasses the entire global economy. In the USA and Japan as well as in the euro region, economic development slowed massively in 2008, and a recession is predicted for many countries in 2009. The economies of Central and Eastern Europe held up relatively well but are now also showing signs of a slowdown.

Dramatic collapse in economic activity

While the economy in the euro region still appeared quite dynamic at the start of 2008, the picture quickly clouded over. A decline in GDP began in the 2nd quarter and accelerated up to the end of the year. After the bankruptcy of the US investment bank Lehman Brothers in October, GDP only grew by just 0.6% in the 3rd quarter. In the 4th quarter, it even decreased by 1.3%.

One of the main factors for this decline was the diminished consumption behaviour of private consumers due to the financial market crisis, which in turn led to a decline in industrial production. Investments and exports also exhibited stagnating to declining tendencies. Only government expenditures and a build-up of stocks made a large contribution to economic performance. The rate of inflation, which had increased significantly up to mid-year due primarily to the very high oil price, has fallen sharply again since August. Overall in the euro region, the rate of inflation was 3.3% in 2008.

Insurance industry enjoys solid premium growth

The Austrian insurance industry exhibited premium growth in 2008 of 2.5% to reach €16.3 billion, thereby exceeding both the general economic dynamic as well as the growth rate of the previous year (2007: +1.8%). The strongest growth was seen in health insurance at plus 3.5% to over €1.5 billion, following on from a growth of 3.2% in the year 2007. Life insurance charted a strong upward course, gaining 2.2% to reach €7.4 billion after only growing 0.3% in the previous year.

The dynamic in the area of property and casualty insurance sagged somewhat with growth in premiums of only 2.6% to a total of €7.4 billion after a growth rate of 3.1% in 2007. This was due primarily to motor vehicle insurance, which saw a fall in volume of 2.0% (2007: –0.8%) alongside a continued decrease in average premiums. The remaining lines of property and casualty insurance also saw slower growth than the previous year at 3.2% (2007: +3.7%).

Massive turbulence on the financial markets

The continued difficult situation on the international financial markets hit a new low in September 2008. Poor economic data from the USA and problems at international banks caused by the subprime crisis had already produced serious fears that the financial crisis would spread to the real economy. The collapse of Lehman Brothers intensified the situation abruptly. This not only led to a worldwide crisis of confidence and massive price drops but above all to a shortage of external credit financing with associated cost increases. Numerous – even renowned – banks all over the world fell under pressure due to the lack of sufficient refinancing options.

After the government in the USA passed an economic package of USD 700 billion for stabilisation of the financial market and restoration of trust, the EU also passed joint measures for strengthening of the European financial sector in October. Similar packages were passed at national level. For instance, the Austrian federal government passed a corresponding programme amounting to €100 billion.

Falling key and money market interest rates

Considerable rate decreases as part of these economic measures to combat the financial market crisis led to a significant lowering of the interest level worldwide. To secure refinancing of the banks, the USA, Switzerland and Japan lowered their key rates to practically zero. The European Central Bank also lowered its main refinancing rate at the start of December 2008 by 75 basis points to 2.5%; this was followed in January, March and April of 2009 by further reductions of a total of 125 basis points to 1.25%. In view of receding inflation, additional interest rate decreases are expected in the future. The spread between the key and market interest rates also decreased further toward the end of the year and stood at only 39 basis points at the end of December 2008 for the three-month EURIBOR. The one-month rate was even below the key rate in January 2009.

Bond yields in the euro zone have recently fallen significantly, and they reached a record low in the USA due to the lowering of interest rates by the Fed. The rallying of the bond markets on which this was based can be attributed to the expectation of further rate decreases, the poor general economic data and the general risk aversion of investors, who relied more heavily on “safe” papers.

The euro lost about 4.2% against the US dollar compared with the previous year, but exhibited high volatility over the course of the year. A steep increase in the 1st quarter was followed in the 2nd quarter by a period of continued strength; as of September, however, the euro fell considerably against the US dollar until it rose again strongly in December.

Very cautious forecasts for 2009

According to current predictions by economic analysts, economic developments will be extremely weak during the first half of 2009 in particular. In the USA, the state economic aid packages may only partially compensate for low consumer demand, and only a moderate recovery is expected here for the second half of the year. A significant downturn is also predicted for the first half of the year in the euro zone, Japan and Switzerland.

For 2009 overall, economic analysts currently expect the economy in the euro region to shrink by around 2.8%. Austria will remain slightly above this level at about –2.2%, according to current forecasts. The economies of Eastern and South Eastern Europe will develop at above-average rates, if less dynamically than in previous years.

A slight slowdown in growth to +1.5% is predicted for the Austrian insurance industry. The general picture may change very little with the expected growth of 1.8% in property and casualty, 3.1% in health and 0.8% in life insurance. According to current expectations, motor vehicle insurance will remain in decline (–1.7%).

Financial markets remain subdued

In view of the general uncertainties, the further development of the international financial markets is difficult to predict. From the current perspective, a continuation of the high demand for bonds can generally be expected. The stock markets, on the other hand, are suffering under the prevailing uncertainty and the unappealing economic outlook. However, it remains to be seen whether the state economic stimulus packages will take effect at least in Asia and Europe and allow a continuation of the slight recovery seen toward the end of 2008. In the USA, on the other hand, no appreciable positive market impulses are expected at least over the short term either based on economic data or pronouncements by companies.