Economic Environment

General Economic Situation

The global economy initially appeared to be relatively resistant in 2008 to the continuing fears regarding the creditworthiness of financial market products and institutions in the USA and Europe. However, rising commodity prices and the extremely weak dollar increased growth risks. Concerns regarding price stability prompted many central banks, including the European Central Bank, to increase interest rates in the summer. 

In the late summer, increasing tensions on the financial markets led to speculation regarding liquidity problems at some financial market institutions in both the USA and Europe. To cap it all, the insolvency of a major American investment bank rocked the stability of the global financial sector. Governments and central banks then immediately issued guarantees for financial institutions and savings deposits running into the billions and provided the money markets with liquidity.

Nevertheless, the pronounced uncertainty as to how the crisis would play out quickly had a negative effect on investor and, to some extent, consumer activity in the real economy. This was exacerbated by restrictive lending policies on the part of the banks. The slowdown in growth led to a recession in almost all developed economies. The combination of a recession in the real economy, a growing financial market crisis, and emerging fears of deflation prompted central banks to make historically large interest rate cuts in the final months of 2008.

Continental European economies were badly hit by these developments, recording significantly lower growth rates in 2008. At the same time, inflation increased, fuelled in particular by the rocketing oil and energy prices at the beginning of the year. The picture is similar in the USA, where economic growth continued to slow in 2008, while inflation rose sharply. Even the rapid rate of expansion of the Chinese market declined significantly to just under 10% in 2008, from approximately 12% in the previous year. Although Continental Asian countries recorded reduced, but still positive growth in 2008, Japan’s economic output declined slightly. The pace of growth in Latin America and Eastern Europe remained essentially stable at approximately 5% and approximately 6% respectively.  see Charts 03-05

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