The global economy grew by 3.4% in 2014, a figure slightly higher than in the previous year (3.2%). From a medium-term perspective this represents a moderate growth rate. Within the year, however, the development of the world’s economy can be split into two phases: after only a very restrained increase in output during the first six months of the year, it picked up sharply in the second half. Global trade also moved in step with output.
In advanced economies and economic regions the cyclical trend also varied rather widely: positive signals came out of the United States and United Kingdom. Thanks to the considerably brighter state of their labour markets, the expansionary trend in both countries gathered appreciable momentum. In the Eurozone, on the other hand, business activity picked up only marginally – after the economic recovery had actually ground to a complete halt in the spring – because there was no significant improvement in the basic framework conditions. Japan even slipped back into recession, although this is likely to be merely temporary.
Economic developments in emerging markets gave more grounds for satisfaction in 2014, although the underlying tendency remains muted. China and India saw the onset of a lowlevel revival during the course of the year. This was also true of Latin America, where Brazil turned the corner after sinking to an economic low point. While Russia did not experience the anticipated decline in total economic output thanks to a record grain harvest, the political crisis in relation to Ukraine cast an increasingly dark shadow over its investment climate.
The US economy was able to put its upward trend on a stable footing: gross domestic product (GDP) recorded a growth rate of 2.2%, just as in the previous year. The economy in the US thus expanded more vigorously than virtually any other industrialised nation. Exports picked up, but other sectors of the economy also showed impressive gains. Along with increased investment by companies and higher consumer spending, the state also played its part in growth – boosting arms spending, for example, to an extent not seen for years. Gainful employment continued to rise on the labour market, causing the jobless rate to fall to its lowest level in a long time in October at 5.8%.
While the Eurozone economy recovered in 2014, it remained weak overall. After the decline of the previous year (-0.4%), modest growth of 0.8% was recorded in 2014. Two key factors in the persistently unsatisfactory development of the economy were the protracted sluggish growth in Italy (-0.4%) and the fact that Germany’s uptick came very late in the year. In France, too, economic output climbed only marginally (+0.4%). In crisis-ridden Greece the recovery was sustained (+1.0%) and in Spain, too, the economy began to rally (+1.3%). The European labour market continued to stabilise, although unemployment was still high at 11.6% and the disparities between individual countries were in some cases considerable. The rise in consumer prices was again smaller than in the previous year at just 0.5%.
Growth in Europe was supported by further monetary policy measures taken by the European Central Bank (ECB) in June and September of 2014 as well as by the sharp drop in the price of oil towards year-end.
Buoyed by the mild winter weather, the economy in Germany got off to a good start in 2014. However, the investment climate soon began to cool appreciably during the spring. It was not until the end of the year that signs of a recovery began to emerge again. For the year as a whole gross domestic product grew by 1.5%. Private consumption was a major driver of the upswing, with low interest rates and modest energy prices further helping to boost consumption. The overall economic development was also helped by foreign trade: exports grew more strongly than imports during the six summer months. All in all, though, it was the domestic economy that remained the most significant growth engine. The recovery on the labour market was sustained over the year as a whole, with the working population reaching a record level of 43.1 million in November (+1.0%).
Prices in Germany continued to trend higher in 2014, although low energy costs put a significant brake on inflation. Consumer prices rose by 1.0%. On the domestic producer side prices for intermediate, capital and consumer goods moved higher, while the upsurge in the cost of construction work was sustained. The increase in residential property prices was comparatively moderate.
After showing marked weakness in the first half of 2014, production rallied in most major emerging economies in the second half of the year. In China the recovery had already set in during the spring, although the full-year growth figure of 7.4% was moderate by that country’s standards. What is more, it was assisted by temporary economic policy stimuli. On the market side the Chinese economy benefited from particularly lively foreign demand; it came under strain, on the other hand, from the downturn on the property market. This depressed prices for residential accommodation and curtailed the impetus for higher consumer prices.
India extended its growth rate year-on-year to 5.9%, although the pace of the increase in industrial output was already slowing towards year-end.
In Japan the hike in value-added tax in the spring prompted a steep drop in demand among consumers, which dissipated only hesitantly as the year progressed. Business activity was also noticeably depressed, slumping particularly sharply in the second quarter of 2014. This prompted the central bank to resort once more to monetary policy measures. By year-end the signs were again pointing towards recovery. All in all, growth came in at 0.2% for 2014.
The lingering effects of the Euro debt crisis on capital markets were merely indirect in 2014. Markets were considerably more influenced, especially towards year-end in the Eurozone, by concerns among market players that deflation might take hold. The expansionary monetary policy pursued by central banks in our main currency areas (euro and US dollar) was therefore maintained. The European Central Bank (ECB) trimmed the main interest rate for Euroland twice in the course of the year from 0.25% to the current level of 0.05%, while the US Federal Reserve left key interest rates unchanged in the low range of 0.00% to 0.25% – where they have been since 2008. It should, however, be noted that the Federal Reserve discontinued its supportive purchases on the US bond market in the fourth quarter, whereas the ECB put just such a bond-buying programme on the table at year-end for the Euro government bond market. Over the year as a whole German and UK government bonds saw sometimes marked declines in yields across all maturities. The yield on ten-year German government bonds, for example, retreated from 1.9% to 0.5% in the course of the year. These declines were facilitated by the anticipation of impending active market intervention by the ECB as well as by considerable liquidity in the markets and the search for safe investment opportunities. In the case of US Treasuries, isolated modest yield rises could be observed only in the short to medium-term maturity segments; here too, however, longer maturities saw yields drop. The return on ten-year US Treasuries, for example, fell from 3.0% to 2.2% over the course of the year. This decline can be attributed primarily to muted inflation expectations. As for the European nations with higher risk premiums that have been the focus of so much attention in recent years, the picture was largely one of recovery. Greek government bonds reflected emerging uncertainties at the end of the year about the country’s future economic policy with rising yields. Risk premiums on investment grade corporate bonds in our main currency areas decreased somewhat as the year progressed. The picture in the sub-Investment grade segment was a mixed one. The declines in yields that ultimately ensued were fuelled principally by the interest rate component.
Major equity markets moved higher in the course of the year, in some cases soaring to new record highs, although only the US market was able to book appreciable price gains over the year as whole. In contrast, European indices were, if anything, left treading water year-on-year. Here, too, markets were influenced by the continued expansionary monetary policy pursued by central banks and by the quest among investors for high return investments. Ultimately, though, the elevated price levels could only partially be explained by the underlying fundamentals. The development of the world’s economy continues to be subject to a broad range of uncertainties and risks. Most notably, the global patchwork of differing economic developments and local flashpoints such as in Ukraine may be mentioned as causal factors here. These disparities are being further exacerbated by the precipitous fall in the price of oil, which has a beneficial economic effect on countries with a large appetite for energy but jeopardises the budgets of oil producing nations.
The euro dropped sharply year-on-year against the US dollar from USD 1.38 to USD 1.22. It similarly depreciated considerably against the pound sterling as well as the Australian and Canadian dollar, especially in the second half of the year. This can be attributed in large measure to the prevailing low level of returns offered by the euro area, but also reflects the minimal expectations as to a recovery any time soon.
For more detailed remarks on the development of Hannover Re’s investments please see the “Investments” section.