Overall economic development

The 2008 financial year witnessed the most drastic financial market crisis since the Second World War. The subprime segment of the US real estate market must be regarded as the origin of this crisis. It resulted, most conspicuously, in a crisis of confidence among banks as well as in the stability of the global financial system. Government intervention and aid packages on a hitherto unprecedented scale ensued. Central banks around the world slashed key interest rates, thereby lending support to fiscal policy measures on the monetary side.

The effects of the financial market crisis on the real economy exacerbated the cyclical weakness that had begun to set in at the start of the year and plunged the global economy into a recession in the second half of 2008. Growth rates in gross domestic product fell around the world: US economic output still grew by 1.1% in 2008 overall, but the slump in the final quarter of 2008, amounting to an annualized –6.2%, was extraordinarily abrupt. The Eurozone similarly recorded minimal growth of 0.7% for the full 2008 financial year, despite an annualized decline of –5.7% in the fourth quarter.

The German economy, too, was impacted by this development. Gross domestic product in the final quarter contracted by 1.6% relative to the previous quarter, equivalent to an annualized decline of –8.2%. This fall was attributable above all to softer demand in foreign markets, as reflected in sharply weaker exports. It was only thanks to a strong first quarter that overall growth of 1.3% was achieved in the year just-ended.

Development of real gross domestic product

The trend in consumer prices was crucially shaped by rising commodity and food prices until the end of the first half-year. The price trend peaked in July 2008 at 5.6% p.a. in the United States and 4.0% p.a. in the Eurozone. Plummeting commodity and food prices – fostered by growing pessimism about the economic outlook – led to sharply falling inflation rates. Inflation in the United States stood at just 0.1% p.a. in December, while in the Eurozone it had decreased to 1.6% p.a. by year-end.

Central banks responded to the financial market crisis, falling rates of inflation and the biting recession – the Fed and the Bank of England slashed key interest rates in record speed to the lowest levels in their history: the US Federal Reserve reduced prime rates by more than 400 basis points (bp) in the course of 2008 to a range of 0 to 0.25%, while the Bank of England made cuts of altogether 300 bp to a record low of 2.0%. Ultimately, the ECB also reduced base rates by 175 bp to 2.5%. What is more, the central banks made additional liquidity available through their extended money market instruments and the direct purchase of securities.