The expansion of the global economy slowed somewhat in the course of 2015 and came in slightly below the level of the previous year at 3.1% (3.4%). Even though the anticipated slump in the world economy therefore failed to materialise, this is the weakest growth figure since the crisis year of 2009.

The advanced economies continued to record moderate growth on the whole, although economic activity varied widely between countries and regions. As had already been the case in the previous year, the pace of growth in the United States remained strong. In the United Kingdom, too, cyclical momentum remained intact despite a slight slowing in the expansionary trend. The economy in the Eurozone also developed favourably, although the pace of growth here remained minimal overall. While certain framework conditions such as the employment situation improved slightly, this was not sufficient to deliver a fundamentally positive upward stimulus. Business activity weakened markedly in Japan.

Economic growth in emerging markets was softer in 2015, although initial signs of stabilisation could be discerned towards year-end. The first six months, above all, were overshadowed by some particularly dark economic clouds: Russia and Brazil slipped deeper into recession. Drastic price declines on stock markets in China prompted concerns towards the middle of the year that the Chinese economy, too, might be drawn into a crisis-driven process of adjustment. Even though such a scenario did not materialise in the second half of the year, the pace of growth in the emerging economies was on the moderate side. In Russia indications have recently emerged of a stabilisation in output. In Latin America, on the other hand, the situation remained difficult.

United States

The positive momentum of the US economy continued to stabilise in the past year. Gross domestic product (GDP) added another 0.3 percentage points in 2015 (previous year: 2.2%). This was despite the fact that the economy had entered the year with softer growth. The upward revaluation of the dollar hampered US foreign trade, capital investment contracted and consumption also slowed somewhat initially. Viewed over the full year, however, the economy showed a further clear trend towards stabilisation. Private consumption continued to pick up and government spending also increased. The development of the labour market, where the unemployment rate has now fallen to 5.0%, points to a sustained cyclical upturn.

Europe

The economic climate in the Eurozone showed a modest recovery: growth increased by 0.6 percentage points to 1.5%. The improved performance of countries that had still been experiencing discernible growth problems in 2014 was a factor here. Italy, for example, put the difficult previous year behind it to deliver positive growth of 0.7%, while France boosted the pace of its expansion to more than one percent again. The Spanish economy picked up sharply with growth of 3.1%. Ireland, the peak growth performer, put on another 6.5%. After securing a hard-fought agreement with the countries giving it financial backing, Greece is struggling to implement austerity plans and will likely achieve at best zero growth in 2015.

The state of the jobs market continued to improve. Average unemployment in the Eurozone decreased to 11.0%, although the picture still varies widely from country to country. Spain, along with Greece, continues to battle particularly high jobless numbers: the unemployment rate for both countries is in excess of 20%. The rise in consumer prices, on the other hand, slowed again year-on-year to 0.1%.

Germany

The German economy experienced a modest uptick in 2015. In the first half of the year it expanded at rates that reflected the potential output. In the third quarter the pace of growth then flagged for a while. Over the year as a whole the economy grew by 1.8%. Expansion continued to be driven by private consumption. The latter benefited from an appreciable rise in employment, increasing real wages and the falling price of crude oil. Additional factors boosting consumption were the unchanged very low level of interest rates, the introduction of the minimum wage and expanded transfer payments. Investment activity was rather slow to pick up, albeit with a rising tendency towards the end of the year. Exports surged irrespective of the mediocre pace of global economic growth. The recovery in the Eurozone and depreciation of the euro were major factors here. The German labour market continued to improve: on an annual average the working population rose to a record high of 43 million (+0.8%). The number of unemployed dropped below two million in 2015, a decrease of 6.7% compared to the previous year.

Asia

Heavily influenced by economic weakness in China and declining commodity prices, Asia’s emerging markets delivered a moderate pace of expansion overall in 2015. In China growth in the first quarter fell to the lowest level since 2008, triggering significant uncertainties on capital markets over the summer. Industrial output nevertheless stabilised over the year as a whole, and the Purchasing Managers’ Index also signalled a stable development. China consequently registered growth of 6.8% for 2015. In recent months, however, there have been increasing indications that the economic data does not fully capture the slowing economy. The deflation in producer prices, for example, points to substantial surplus capacities in industry and in the construction sector. The high indebtedness of the private sector continues to pose a further problem. Corporate debt also rose sharply. The sudden slump in share prices at the start of the current year would appear to confirm this assessment.

India further improved its growth rate year-on-year to 7.2%. This was driven principally by the real estate, financial and insurance sectors. Nevertheless, the manufacturing sector, government spending and private consumption also played a part in this positive trend.

The Japanese economy continued to struggle under soft demand from emerging markets in 2015 and its performance was correspondingly weak. The country’s economy recorded modest growth of 0.7% over the year as a whole.

Capital markets

The lingering effects of the Euro debt crisis on capital markets were merely indirect in 2015. A considerably more important influencing factor was a high degree of uncertainty surrounding a possible turnaround in US interest rates and a further expansion of monetary policy in Europe. The slowing growth of the Chinese economy led to a general sense of disquiet on equity markets. Falling commodity prices due to changing supply-side structures in an ambiguously evolving global economy were an additional factor. Uncertainty also permeated the assessment of markets for corporate bonds – especially in emerging markets – and led to increased risk premiums. The expansionary interest rate policy pursued by central banks in our main currency areas – namely the euro and US dollar – was consequently maintained. Having cut the prime rate for the Eurozone to 0.05% in the previous year, the European Central Bank (ECB) kept it at this level throughout the entire period under review. Even though the US Federal Reserve made its first move to raise interest rates, as had been anticipated by many market players, US interest rate policy can still be characterised as expansionary from a historical perspective. Nevertheless, the Fed had already ended its supportive purchases on the US bond market in the fourth quarter of 2014, whereas the ECB launched just such a programme in March 2015 for the European government bond market.

Further modest declines in yields were observed for German government bonds with shorter maturities, which therefore continued to deliver negative returns in net terms that extended into the medium-term maturity bands. The yield on three-year government bonds, for example, retreated over the course of the year from -0.1% to -0.3%. These declines were facilitated by the anticipation of further 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, modest yield increases were observed in the short- to medium-term maturity segments; longer maturities tended to remain stable year-on-year. The return on one-year US Treasuries, for example, rose from 0.2% to 0.6% over the course of the year. This increase can be attributed primarily to the expectation among market players that the Fed will make further moves on interest rates. UK gilts saw virtually no changes throughout the period under review. As for the European nations with higher risk premiums that have been the focus of so much attention in recent years, the picture was again largely one of recovery. Risk premiums on corporate bonds in our main currency areas increased – in some instances markedly – as the year progressed owing to developments in emerging markets combined with commodity price movements.

Stock markets, to which we devoted closer attention again due to our decision to start limited rebuilding of an equity portfolio in the third quarter of the period under review, once again soared during the year, in some cases registering new all-time highs; the German market was especially successful in booking substantial price gains throughout the year. US indices, on the other hand, were if anything left treading water year-on-year. European markets, in particular, were influenced by the ECB’s continued expansionary monetary policy 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. Overall, stock markets proved broadly robust in the face of diverse crisis warnings. It was only growing concerns about diminishing economic strength in China combined with slumping commodity prices that triggered a marked downturn on equity markets in August. We were able to turn this to our advantage since we seized the moment to start our already planned rebuilding of an equity portfolio. 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 the Middle East and Ukraine may be mentioned here as causal factors. These disparities are being further exacerbated by the precipitous fall in the price of oil, which has a beneficial effect on countries with a large appetite for energy but jeopardises the budgets of oil-producing nations. The elevated threat of terrorism is another factor that cannot be ignored, even though the response to it from capital markets has hitherto been rather robust.

The euro again dropped sharply against the US dollar in the course of the year, slipping from USD 1.22 to USD 1.09. Against the pound, however, the euro softened at most only slightly over the full twelve months despite marked volatility within the year. To some extent it was even able to make up ground lost against the Australian and Canadian dollar in the previous year. This performance can certainly be attributed in part to the protracted weakness in commodities and the share of exports that they account for in the balance of trade of these countries.

For more detailed remarks on the development of Hannover Re’s investments please see the “Investments” section.