GROUP MANAGEMENT REPORT

Macroeconomic Framework

Global economy thrown off course by financial crisis
For the global economy, 2008 turned into a nightmare. The economic outlook had deteriorated sharply since the summer due to the intensification in the financial crisis. More than anything, it was the insolvency of Lehman Brothers in September 2008 that brought the situation to a head. Media reports included talk of a meltdown in the financial system. Spiraling prices on stock markets, the freefall in prices of risky assets, and the temporary drying up of money markets meant that banks came under ever greater pressure. This led numerous countries to introduce massive state rescue packages for individual institutions and assistance worth billions for the financial sector as a whole.

Given the fundamental crisis of confidence in international financial markets and the negative development in asset prices, the downturn in the real economy gained further momentum in the fourth quarter of 2008, with no sign of the recession bottoming out since then. The sudden increase in risk aversion has led to a marked deterioration in financing terms for companies, and that in spite of energetic interest rate cuts by central banks. The downturn in global demand has hit economies heavily dependent on exports, such as Japan and Germany, especially hard, as well as a number of emerging markets. The effects of this have been felt particularly keenly in major sectors of the economy, such as the automobile and engineering industries. However, other sectors have also witnessed drastic reductions in capacity utilization rates since autumn 2008, and have reacted by massively scaling back new investment.

The corrections in the prices of commodities and oil due to economic developments, which have seen crude oil prices collapse by more than 70 % at times since peaking in July 2008, have been insufficient to compensate for the negative effects in terms of foreign trade. Having said this, the reduction in energy prices in particular at least led to a marked reduction in consumer price inflation at the end of 2008. This boosted purchasing power, thus lending a certain degree of stability to private consumer spending. At base, however, this was unable to cushion the downturn in the global economy to any significant extent.

Europe in recession
The strong start to the year meant that total economic output in the euro area still managed to grow by 0.8 % in the 2008 calendar year (2007: 2.6 %). In the second half of the year, however, the global recession cast an ever greater shadow over Europe. According to Eurostat, the statistics authority of the European Communities, real-term gross domestic product (GDP) adjusted for seasonal factors fell by 1.5 % in the fourth quarter compared with the previous quarter. That marked the third reduction in succession, and was also the most severe downturn since the introduction of the European Currency Union at the beginning of 1999. Economic output fell 1.3 % short of the previous year’s figure.

The decline in economic output was chiefly due to the drastic cutback in industrial production in response to the collapse in new orders. In December 2008, these were 22 % down on the previous year’s figure in the euro area. In terms of distribution, the economic downturn in the fourth quarter of 2008 was reflected most clearly in exports, which fell by 7.3 % on the previous quarter, and thus notably more rapidly than imports (minus 5.5 %). Capital investment decreased by 2.7 %. Growing uncertainty concerning future economic developments and the labor market outlook also weighed on private consumer spending in the final quarter of 2008. This decreased by 0.9 % compared with the third quarter. Within the euro area, Germany reported the sharpest drop in real-term GDP in the fourth quarter of 2008, followed by Portugal and Italy. Only Cyprus and Greece still managed to report growth. According to the European Commission, the downward economic course, which has also affected the economies of EU member states in Eastern Europe, is set to continue at least until mid-2009.