OVERALL BUSINESS DEVELOPMENT

Economic environment

The global economy was marked by the escalating financial market crisis, whose repercussions for the real economy, even outside the United States, were clearly felt in the course of 2008. The world economy cooled off appreciably, with growth in global gross domestic product (GDP) only 3.1% (2007: 4.7%). As a result, a number of industrial countries are in or are on the verge of recession and the expectation that the emerging economies could decouple from the economic trend in the industrial countries was not fulfilled.

There were extreme fluctuations in commodity prices in 2008, with a strong rise in the first half of the year followed by an even steeper fall later in the year. This development was driven not only by underlying factors but also by speculation. The price of Brent oil climbed from January to July to reach a new record high of about US$ 145 per barrel. The ensuing sharp fall by almost 70 % to a low of US$ 44 per barrel was largely attributable to the rapidly worsening outlook for the world economy.

The euro’s strength against the US dollar also flagged considerably in the last months of the year. In mid-July the euro was worth US$ 1.57. By the end of the year it was worth only US$ 1.39, a substantial drop of about 11%. That the US dollar firmed against the euro despite the lower level of US interest rates can be largely attributed to the repatriation of US investments abroad. US investors have increasingly pulled capital out of the emerging markets, with the resulting demand for dollars causing the US currency to appreciate relative to other currencies.

Europe
The economic dynamic in the Eurozone weakened appreciably in 2008. GDP growth was 0.9%, well below the previous year’s level of 2.6 %. Despite the strong trade links within the single market, the weakness of the US economy and the global financial market crisis had a dampening effect on the economy in all member countries of the Eurozone, albeit to differing extents. Countries that had also witnessed a property boom, such as Spain and Ireland, were hit harder by the correction to the property market, with declining investment in residential construction and falling asset prices. Germany, on the other hand, was affected more by the indirect repercussions of the crisis, feeding through later in the form of weak foreign demand. The labor market continued to improve. The unemployment rate in the Eurozone was 7.4%, the lowest since recording began. Given the massive economic downturn, the jobless rate in Europe is likely to rise significantly in 2009. Government budgets also felt the effects of the slowing economic momentum. Higher government spending, especially as a result of the support measures in response to the financial market crisis, caused deficit levels to rise. Another concern in the first half of 2008 was the steep rise in the inflation rate in the Eurozone to almost 4%, with strong inflationary pressure coming especially from higher commodity and food prices. In the second half of the year, both the weakening economic dynamic and the strong fall in the oil price caused inflation to ease significantly. At the end of the year the inflation rate was close to the ECB’s target of about 2%.