Quarterly Report 1/2009 - Munich Re Group

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Interim management report Key parameters 6 Munich Re Group Quarterly Report 1/2009 Interim management report Key parameters – Sharp recession in the USA, Europe and Japan – Financial sector still not stabilised – Lowering of interest rates and unconventional monetary-policy measures by central banks – Extensive government packages to shore up the financial system and the real economy The first quarter of 2009 was dominated by reports of a rapid and strong contraction in economic activity and increasingly pessimistic forecasts for the development of the global economy. The continuing financial crisis has triggered the severest recession since 1945 in most industrial nations and caused a marked cooling of the economies of many emerging countries. Several central banks have meanwhile lowered their interest rates to nearly zero and are resorting to unconventional means to stimulate the provision of credit and thus investment and consumption. In the period under review, many governments made further efforts to overcome the crisis of confidence in the financial system by giving guarantees, recapitalising or assuming risk positions, and to bolster the real economy with further support packages. Whereas in 2008 inflation rates had risen and fallen rapidly owing to the turbulent development of the oil price, in the period under review price levels remained relatively stable. In some countries, the recession led to deflationary trends. According to a provisional estimate, in the first quarter of 2009 the US economy shrank at an annualised real rate of 6.1% compared with the previous quarter. Economic activity in the USA had already declined more strongly in the fourth quarter of 2008 than at any time since 1982, owing to falling consumption and exports, with negative growth of –6.3% (also annualised and compared with the previous quarter). The number of unemployed increased by nearly two million to 13.2 million in the period under review, causing a corresponding jump in the unemployment rate to 8.5%. Lower food and energy prices resulted in a 0.4% year-on-year reduction in the US consumer price index in March, the first 12-month decline since August 1955. After the decrease in economic output had accelerated in the eurozone in the fourth quarter of 2008, record lows in the confidence indicators for consumers, the manufacturing industry and the services sector in the first quar ter of 2009 signalled that the recession is likely to persist for some time. The global downturn has hit Germany’s export-oriented economy particularly hard: production in the German manufacturing sector fell by 7.5% in January compared with December, again decreasing at a higher rate than in the preceding months. The eurozone’s annual inflation rate in March was a low 0.6%, compared with 3.6% only one year before. The Japanese economy is also reliant on exports and thus badly affected by the global crisis. From October to December 2008, economic output dropped by 4.3% compared with the previous quarter. In the period under review, Japan’s exports showed a sharp reduction and were 45.6% lower in March 2009 than in the same month last year.
Interim management report Key parameters The financial crisis has also affected economic growth in numerous emerging countries. Many economies in eastern Europe which had grown strongly in recent years were plunged into recession by the outflow of foreign capital and the lack of demand from the eurozone. Support from the International Mo n etary Fund was extended to Belarus, Serbia and Armenia in the period under review, and Romania has obtained a corresponding promise of support. In China, economic growth also suffered considerably from the global crisis, but domestic demand still proved to be relatively robust. In the reporting period, the US Federal Reserve and the Bank of Japan kept the target rates they had introduced in December at 0–0.25% and 0.1% respectively. The European Central Bank lowered its reference interest rate in the first quarter in two stages from 2.5% to 1.5%, and most recently in April to 1.25%, whilst the Bank of England also reduced its key interest rate in two steps from 1.5% to 0.5%. With the low-interest policy showing scarcely any impact on the capital markets to date, several central banks have resorted to further drastic and unprecedented means to provide the economy with liquidity, such as buying government bonds or short-term loan notes directly from companies. The euro initially fell from US$ 1.39 to US$ 1.25 in the period under review. By the end of the quarter, it had recovered to US$ 1.33. This was significantly due to the US Federal Reserve’s announcement on 18 March that it intended to buy up long-term US government bonds with a volume of up to US$ 300bn. As a result, yields on ten-year US government bonds plunged by 51 basis points within the course of one day. At 31 March, yields on US ten-year government bonds stood at 3.3% and those on German government bonds at 2.8%, which was slightly higher than at the beginning of the year. The stock markets in the USA, Europe and Japan lost considerable ground in the first quarter of 2009. The Dow Jones closed at 7,609 points on 31 March, approximately 13% down on the beginning of the quarter, whilst the EURO STOXX 50 lost around 15% in the same period, closing at 2,071 points. The Nikkei, which finished the quarter on 8,110 points, showed a comparatively small decrease of a good 8%. At the end of the period under review, the markets rallied after recording several multi-year lows since the beginning of March. The oil price in this period was far below the record highs of summer 2008 and generally remained within a range of US$ 40–45. Despite the continuing recession, it rose above US$ 50 in the second half of March, reasons being the relatively weak dollar and the recovery on the international stock markets. The economic outlook for the rest of 2009 and for 2010 is extremely uncertain. For 2009, we expect a global recession, since economic activity in many countries is markedly and rapidly declining. An economic recovery – accompan ied by a revival of inflation – appears possible at the end of 2009 or in the course of next year. However, the preconditions for this are that the financial sys tem stabilises, the credit crunch eases, and the government economic programmes work. Should the desired effects not be realised, there is the risk of prolonged stagnation or recession in many economies. This scenario also harbours the risk of deflation. Munich Re Group Quarterly Report 1/2009 7
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© 2009 Münchener Rückversicherun
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