Overall economic momentum in the insurance industry remained restrained in 2014. Although there was no new recession, the economic recovery in the euro zone remained hesitant and the change in gross domestic product (GDP) at 0.9 per cent in real terms was below the expectations of economic researchers. Private consumption is only recovering slowly and corporate investments were too low in many euro zone countries to provide significant momentum for growth and employment. Monetary easing and historically low real interest rates have not yet resulted in the boost in demand which had been hoped for. The development of disposable income in many European countries also remains somewhat stagnant. These factors also contributed to the fact that economic growth of 0.3 per cent in Austria in 2014 fell somewhat below the average in the euro zone. Austrian households responded with a lower tendency towards saving, and at 7.4 per cent the savings rate fell in the 1st half of the year below the average over many years. Italy’s economy also remained below expectations in 2014 with a slight recession.
The high unemployment rates continue to point to low utilisation of available economic capacity. However, there has been some relief for the labour markets recently with unemployment rates falling to 11.5 per cent at year-end in the euro zone. The unemployment rate in Austria in 2014 was 5 per cent and 12.9 per cent in Italy according to calculations by Eurostat.
The yields on fixed interest securities from euro zone issuers again reached new lows in the past year. The effective interest return of German government bonds with a 10-year maturity fell to less than 0.4 per cent at the start of 2015. The compression of interest rates and risk premiums ran through virtually the entire range of investments. European corporate bonds and mortgage bonds were also affected by this. Deflationary price developments reached the euro zone towards the end of the year and the rate of inflation was minus 0.3 per cent in February 2015. The European Central Bank continued its process of monetary easing. The key interest rate is virtually zero and the ECB’s deposit rate is minus 0.2 per cent. The ECB also started its process of high-volume, unlimited bond purchases (“quantitative easing”). It can be expected that interest rates will generally remain very low for a longer period of time as a result of the slow recovery in the euro zone, low levels of inflation and this major monetary policy stimulus.
The general economic settings in Central and Eastern Europe are becoming increasingly heterogeneous. Central Europe (Poland, Slovakia, Czech Republic and Hungary) is one of the more stable regions. The upturn in domestic demand is providing real momentum, the labour markets are improving and low inflation and interest rates are bolstering the economy. Economic growth was around 3 per cent on average in real terms in Poland, Slovakia, the Czech Republic and Hungary.
The slowdown in the Russian economy intensified in 2014, with GDP only rising by 0.6 per cent in real terms. A rapid fall in the price of oil, the international economic sanctions and a more restrictive monetary policy by the Russian Central Bank compounded the downturn and could lead to a recession in Russia. The slump in the Ukrainian economy was largely caused by the unresolved conflict that is being carried out increasingly by military means in eastern Ukraine. The country remains dependent on international financial aid despite a standby arrangement agreed with the International Monetary Fund (IMF) and financial aid received from the European Union in the last year. The tense economic situation triggered a dramatic correction in the currency markets. Both the Russian rouble and the Ukrainian hryvnia lost more than 50 per cent of their values against the euro over the course of 2014.
The process of economic transformation is unfolding at differing speeds in the countries of Southeastern Europe. Romania recovered economically with growth in GDP of 3 per cent in real terms. Bulgaria’s economy is slowly overcoming the stagnation of recent years. Croatia has so far been unable to make the most of its membership in the European Union. The country has to bear the consequences of several years of recession and will also barely emerge from stagnation in 2015. Events in 2014 in Serbia as well as Bosnia and Herzegovina were overshadowed by the flood disasters in May. The consequences of the bad weather are expected to be overcome gradually and investments in reconstruction could provide some economic stimulus. The south-western Balkan countries (Albania, Kosovo, Macedonia and Montenegro) recently recorded economic growth which was slightly above the average for the region.
Overall, the process of convergence in the countries in Central and Eastern Europe is proceeding at a slower pace than that forecasted by the economic researchers, both after the 2008/09 financial crisis as well as after the 2011/12 euro crisis. The centre of conflict in eastern Ukraine and the tense geopolitical and economic situation in Ukraine and Russia are factors which are also expected to cast their shadow over the European economy in 2015. Positive effects are expected in the euro zone economy as a result of lower oil prices on the global market, the devaluation of the euro in relation to the currencies of important trading partners and in part through the quantitative easing by the ECB.