Economic environment

The macroeconomic environment continued to cool down in 2019. According to forecasts (OECD), the world economy grew by 2.9 per cent, its lowest rate since the 2008/2009 financial crisis. World trade is stagnating despite a deescalation in the US/China trade conflict (“Phase One” deal). The United Kingdom left the European Union on 31 January 2020, although uncertainty over their future trading relationship is continuing to weigh on the economy. Many countries, including Germany, are finding that industry is their weakest link, while their service sectors are flourishing. The downward trend in business confidence reached a first low point at the beginning of 2020. The economic impact of the spread of the coronavirus is still uncertain in March 2020, but there are already signs of a radical impairment of economic activity. Its extent will depend on the of the crisis and the public measures to prevent the spread on the one hand, and on the attempts to bridge the temporary losses of income for companies and households on the other.

Gross domestic product (GDP) in the eurozone rose by 1.2 per cent in 2019. This means that growth was slower compared with the previous year. Consumption by private households continued to be bolstered by a healthy labour market: at the end of 2019, the unemployment rate in the eurozone was at a precorona low (7.4 per cent). The Austrian economy put in a solid performance in 2019. Despite growing international risks facing the economy, GDP growth for the year amounted to 1.6 per cent. Although here, too, the economy had cooled off compared with previous years, there were increasing signs of stabilisation on a path of modest growth towards the end of the year. However, a decline in international trade and the demand for industrial goods were curbing growth in the manufacturing sector. By contrast, the trend in the service sector was still very pleasing at the start of 2020, while demand amongst private consumers remained brisk thanks to the robust labour market. Both employment and wages were on the rise, while unemployment was at a very low 4.2 per cent. Disruptions of economic activity caused by people not working, interrupted supply chains, slumps in sectors directly affected by the impact of the coronavirus such as tourism and transport, and the influence of government measures to contain the further spread of the disease are expected to have a major, albeit temporary, effect on the development of the Austrian economy.

The European Central Bank (ECB) performed something of a U-turn in September 2019, bringing a temporary phase of monetary normalisation to an end with new measures to stimulate the economy and push up inflation. It reduced the interest rate on deposits to –0.5 per cent and, in November 2019, the ECB launched another unlimited programme of monthly bond purchases worth €20 billion. Despite this comprehensive monetary policy stimulus, inflation growth remains weak, meaning that a normalisation of monetary policy and interest rates is unlikely to be on the cards for the next few years under the ECB’s new president Christine Lagarde as well. A strategic review will be carried out from 2020 onwards to assess the effectiveness and appropriateness of the monetary policy instruments being deployed, amongst other things. The Federal Reserve, the US central bank, completed its midcycle adjustment with three interest rate cuts in 2019. In March 2020 central banks and governments around the world responded to the emerging consequences of the coronavirus spread. In two emergency meetings of the Open Market Committee, the Fed cut key interest rates by a total of 150 basis points. Its target range for key interest rates is thus 0 to 0.25 per cent. Furthermore, both the Fed and the ECB decided on new large-volume bond purchases and extensive measures to supply the money and capital markets with liquidity.

Last year Austria benefited from the still highly favourable economic conditions in Central and Eastern Europe (CEE). Economic growth in UNIQA’s core markets in CEE stood at 3.7 per cent (not including Russia) according to forecasts, down slightly on 2018. Nevertheless, CEE is amongst the growth regions enjoying the most rapid expansion and has so far shown itself to be highly resistant to the economic slowdown in the eurozone, an important trading partner for the region. However, negative contagion effects have adversely affected industry and the demand for exports in some countries. In the Czech Republic and Slovakia, economic growth slowed in 2019, with GDP rising by 2.4 and 2.3 per cent respectively according to forecasts. Poland and Hungary, meanwhile, are still enjoying something of a boom (GDP growth of 4.1 and 4.9 per cent respectively). Unemployment hit historic lows in CEE, with the healthy labour market underpinning strong domestic demand.

The Russian economy proved stable, although it offers relatively little potential for growth in the medium term. The planned delivery of national infrastructure projects presents opportunities for some upward movement. Ukraine’s economy, meanwhile, was on the road to recovery: inflation fell sharply in 2019, paving the way for more favourable financing conditions. The central banks in both Russia and Ukraine have begun cycles of interest rate cuts.

GDP growth rates in the economies of Southeastern Europe are around 3.4 per cent on average, with the positive trends continuing on the employment markets and inflation at modest levels. The Balkan countries also offer stable economic conditions as a whole. While there are signs of a temporary interruption of the solid economic development due to the effects of the coronavirus, with economic growth in CEE outstripping that in Western Europe by some margin, the process of income and wealth convergence in the region should continue in line with expectations.

Duration refers to the weighted average term of an interest-rate-sensitive investment or of a portfolio and is a measure of risk for the sensitivity of investments in the event of changes to interest rates.