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Economic environment

The global economy continued to grow in 2011 in spite of events that curbed business activities. Effects from the strong increase of the oil price, which was caused by political unrest in the Arabic region and the earthquake in Japan, were mostly handled by the middle of 2011. An economic slow-down and the escalation of the debt crisis in some industrial countries, however, led to uncertainty and continued volatility in the stock markets during the second half of the year. In spite of the subsequent recovery, the global economic situation remained tense. During the first half of 2011, the main positive effects on the economy were the continuous expansive monetary and fiscal policy of the industrial countries and the still consistent export and investment demand.

Against the backdrop of the weak economy of the industrial countries, the robust economic development in developing and emerging market economies increasingly proved to be the most important pillar of the global economy. In 2011, their average growth was more than three times as high as that of industrial countries and contributed more than half to the growth in global production. Once again, the People’s Republic of China provided important impulses, but Brazil and India have also gained significantly in importance. In 2011, the global economy grew by approximately 3.6% (2010: 5.2%).

GDP SHARE OF LEADING ECONOMIES


in % 2010 2009
Sources: IMF, World Economic Outlook 2011, 2010
United States 19.5 20.4
China 13.6 12.6
Japan 5.8 6.0
India 5.5 5.1
Germany 4.0 4.0
Russia 3.0 3.0

in % 2010 2009
Sources: IMF, World Economic Outlook 2011, 2010
United States 19.5 20.4
China 13.6 12.6
Japan 5.8 6.0
India 5.5 5.1
Germany 4.0 4.0
Russia 3.0 3.0

Europe

In Europe, the growth in 2011 was associated with the slow recovery of the Eurozone during the previous year. The GDP growth declined to 1.6% (2010: 1.9%). The development in the individual countries, however, was very heterogenous: Germany experienced above-average growth, whereas Italy and Spain remained below average. In Portugal (-1.5%) and Greece (-5.3%), the GDP decreased.

The unchanged high unemployment rate of about 10.0% in 2011 prevented a general recovery of the already weak private consumption demand in the Eurozone. While the unemployment rates decreased in Germany, Austria, the Netherlands, and Italy, the situation in the labor market worsened in many countries, including Ireland, Portugal, Greece, and Spain. The effects of the real estate crisis remained especially still noticeable in Spain and Ireland.

The high debt level, the credit rating downgrade by the rating agencies, and the increased risk markup for treasuries especially in the peripheral countries of the Eurozone increased the pressure to pursue ambitious consolidation plans. The economies of the countries in Southern Europe need to become more efficient; with public sector reform especially urgent. Some core countries must also make efforts to bring debt down to sustainable levels. By the end of 2011, problems in the Eurozone finally caused the euro to reach its all-time low against the U.S. dollar since September 2010.

The economic recovery in Germany continued in 2011. Although the good export demand from the first half of the year decreased due to the slowdown of the global economy towards the end of the year, GDP still rose by an average of 3.0% in 2011 (2010: 3.6%). The stable domestic demand, the relatively solid public finance situation, and the decreased unemployment rate contributed to the positive development.

The emerging economies in Central and Eastern Europe face problems that are similar to those of many industrial countries. Restrictive stance of the fiscal policy dampened economic development, and only a few countries, such as Poland, were able to counter with robust private demand. GDP in that region grew by about 3.5%.

United States

The economy in the United States somewhat recovered after a weak first half of 2011; GDP grew by 1.7% in 2011, which is below the previous year’s level of 3.0%. The main reasons for this growth were private consumption and increased investment demand, predominantly from the manufacturing industry, which is gaining in importance.

Also in 2011, the ailing U.S. real estate market was unable to make a true recovery. The labor market with an unemployment rate of about 9.0% – including many long-term unemployed – picked up somewhat, but in essence remained structurally weak. While the private sector created jobs, the public sector cut the number of jobs.

In the U.S., the debt to economic strength ratio has increased since 2008 by 30% to its current 100%. The country was consequently threatened with insolvency during the summer of 2011; its credit rating was downgraded for the first time since the postwar period. In order to stimulate the economy, the U.S. Federal Reserve continued its expansive monetary policy and significantly increased the amount of U.S. Treasuries on its balance sheet. In September 2011, “Operation Twist” was implemented, in which short-term bonds were traded for long-term bonds with a volume of US$400 billion with the goal of lowering interest rates.

The U.S. would like to save US$4.4 trillion over the course of the next ten years in order to stabilize its debt level. Current estimates of likely debt restrictions project total savings of US$1.2 trillion already in 2013. Expense cuts are planned in all public budgets.

Asia

The prospering countries in Asia once again proved to be an important pillar of the global economy. Asia continues to be the most dynamic region in the world. GDP in Asia (excluding Japan) grew by 7.3% in 2011 (2010: 9.4%).

China and India recorded the highest growth rates, with 9.1% (2010: 10.3%) and 7.3% (2010: 9.9%), respectively. Both countries distinguished themselves with pronounced intra-regional networking of their markets and lively domestic demand development. A low unemployment rate, especially in China, productivity gains, and rising wages fostered private consumption. Investment expenses increased due to high capacity utilization and infrastructural initiatives.

In order to counter rising inflation and overheating, the Chinese Central Bank increased the prime rate at the end of 2010 to reduce lending. Thanks to additional measures, the Chinese currency appreciated significantly against the U.S. dollar. After several years of a less expansive monetary policy, a trend towards monetary easing measures has been observed in some emerging economies since the end of 2011: China for instance decreased its minimum reserve requirements in order to counter a cool-down in the economy.

In March 2011, the earthquake and tsunami disaster shook the economy in Japan and significantly impacted the already weak economic development. Experts estimate the financial loss at up to 4.0% of GDP. In spite of additional interventions by the central bank, the significantly appreciated domestic currency continues to put a strain on the Japanese export industry. In 2011, GDP decreased by -0.8% (2010: + 4.5%).

The other Asian countries were only slightly affected by the financial crisis. Most of these countries continued to benefit from the revival of world trade. This positive growth environment and the structural catch-up process explain the much higher growth rates in some cases compared to the developed industrial countries.

Latin America

Stable domestic demand and decreased dependency on developments in the U.S. led to a good, but lower growth of 4.3% (2010: 6.1%) in the Latin American countries compared to the previous year. Due to increased trading relationships with other emerging economies, countries such as Brazil, Argentina, and Chile were less affected by the weak economies of the industrial countries than countries that were highly integrated with industrial countries.

Due to continued strong trading ties with the U.S. and higher inflation rate, the GDP increase in Mexico declined compared to year 2010 to 3.9% in 2011 (2010: 5.5%).

In 2011, Latin America’s biggest economy Brazil was unable to maintain the upward trend of the previous year, which was mainly driven by private consumption. Steps taken to slow down inflation and credit development also decreased economic growth, until the Brazilian central bank initiated a surprise reversal of its monetary policy in August 2011 by lowering the prime rate. Further economic stimulating is expected from the reduction of the consumption tax. Overall, the GDP growth rate clearly decreased to 2.8% (2010: 7.5%).

Argentina, however, again registered the highest increase in the region in 2011, and raised GDP by 7.8% (2010: 9.2%).

Sources: German Council of Economic Experts – Annual Report 2011/2012, bank research

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