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Allianz Annual Report 2012

Business Environment Economic environment 2012 Global Economic Engine sputtering The world economy lost more steam in the course of 2012. On an annual average, global industrial production in- creased by less than 3.5 % in 2012, having risen by a total of 5.4 % in 2011. The increase in 2012 was attributable almost entirely to the emerging markets, above all in Asia, with production rising by more than 6 %. By contrast, production in industrial countries practically stagnated. World trade was also subdued. With an increase of around 2.5 %, 2012 saw the weakest growth in trade since the drop in 2009 fol- lowing the Lehman collapse. This poor global economic performance was primarily due to the ongoing European sovereign debt crisis. The severe fiscal policy squeeze in some Eurozone countries – such as Greece and Spain – not only strangled economic develop- ment in these countries, its impact seeped its way through trade and financial channels, dampening growth prospects for other countries and regions. As the European sovereign debt crisis worsened in the first half of the year, the growth- inhibiting forces emanating from Europe and affecting the globaleconomybecamemoreprominentagain.Inparticular, financial markets became far more jittery, with risk premi- ums on peripheral sovereign debt widening considerably and yields on long-term German government bonds – which the markets increasingly viewed as a “safe haven” – record- ing new historical lows of just over 1 %. The business climate acrosstheglobe,particularlyinthemanufacturingindustry, tookasignificantturnfortheworse.Highcommodityprices also took their toll on the economy. The marked increase in oil prices in the first quarter of 2012 hampered economic development in industrial countries and emerging markets alike. Gross domestic product (GDP) in industrialized countries increased by about 1.1 %on average in 2012. While the United States registered fairly solid growth of 2.2 %, the Eurozone’s real GDP contracted by 0.5 %. As in previous years, economic performance varied widely within the single currency area. The GDP of Greece and Portugal fell by around 6 5 % and 3.2 %, respectively, while other countries like Ireland and Austria registered moderate growth rates of around 0.6 %. The eco- nomic impact of the debt crisis also dampened German growth. Following strong economic expansion of 3 % in 2011, real GDP in 2012 was up only 0.7 % compared to the previous year. By contrast, emerging markets grew 4.5 % on average, with Asian markets recording growth rates of 6.1 %. During the second half of 2012, however, the sentiment on financial markets improved markedly. Practically all asset classes, with the exception of cash, notched up significant positive returns by the end of 2012. Stock markets rallied and spreads on debt-ridden Eurozone countries narrowed sharply. Yields on 10-year German government bonds ended 2012 at 1.3 %. The Euro, which depreciated considerably againsttheU.S.Dollar untilthesummer, rose invalue during the second half of the year, more than compensating for its earlier losses. Key factors in shoring up confidence were the European Central Bank president’s commitment to the ir- reversibility of the Euro and the announcement of outright monetarytransactionsinsecondarysovereignbondmarkets (OMT). More decisive action to manage the crisis at both the national and E.U. level also helped. Intensified national re- forms and consolidation efforts are starting to bear fruit and progress is being made towards enhanced E.U. integra- tion: the European Stability Mechanism (ESM) was inaugu- ratedinearlyOctober2012,proposalsforaEuropeanbanking supervisory regime – which is to start operating in 2014 – were fleshed out and work on a roadmap for the Eurozone is high on the agenda in the first half of 2013. Business environment 2012: insurance and asset management industry 2012 continued to present challenges for the insurance in- dustry. Above all, distressed economic conditions weighed on premium growth. While the European economy shrank and U.S. growth remained fragile, high unemployment in many advanced markets was a drag on insurance demand. Even the economic performance of emerging markets, a bellwether of robust growth in recent years, was somewhat subdued last year. Furthermore, the European sovereign debt and banking crises, persistent low interest rates and financial market volatility all contributed to a very difficult invest­­ment environment for the insurance industry. As a result, invest- ment returns continued to suffer, putting the sector’s profit­ ability under pressure. The industry responded to these challengesbystrengtheningitsinvestmentandriskmanage­ ment processes and reducing operational costs. With the Annual Report 2012    Allianz Group122

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