Global economy and financial markets

In 2005 the world economy grew by 41/2% in real terms, continuing the strong performance of the previous year and exceeding the long-term average growth rate of 31/2%. However, there were significant differences between – and within – the world’s major regions. Growth in Europe remained weak as structural problems persisted, except in Central and East European countries – countries in South-East Europe in particular – where the catching-up process continued at a fast pace. The large countries in Asia, especially China and India, achieved growth rates of up to 10%. This reflects a long-term trend: the vigorous entry of Asian economies into the global division of labour. The “emerged markets” are adding a workforce of 200 million people to the global economy and account for half of world output (calculated at purchasing power parities). In 2005 they were a major factor on both sides, supply and demand, of the global economy. With their high savings ratios, these countries have accumulated substantial foreign exchange reserves and have become major international investors.

The resulting increase in global demand for energy and industrial raw materials led to maximum utilisation of capacity in 2005. In view of limited reserves, particularly of oil and oil products, minor local disturbances – whether geopolitical tensions or sabotage, natural catastrophes or technical failures – sufficed to push up commodity prices. Crude oil prices reached an initial high of 57 USD/bl at the end of March and peaked at 68 USD/bl at the end of August, in the wake of devastating hurricanes in the Gulf of Mexico.

In the first few months of 2005, the oil price rise led to fears of inflation and recession. As the year progressed it became clear, however, that the general impact on prices was limited. Global integration of production (especially competition from high-growth markets) did not provide any major leeway for price and wage adjustments. And reinvestment of the surpluses earned by oil-exporting countries, including Russia, and Asian economies ensured that financial markets were again able to cope with the major fundamental imbalances in 2005.

Worldwide excess liquidity sent long-term interest rates to record lows while accelerating the increase in asset prices, primarily for real estate, in numerous countries. In the US, the Fed therefore steadily raised its key interest rate (from mid−2004, in 14 steps from 1% to a most recent level of 4.50%). The differential between US and euro interest rates thus widened considerably in the course of the year, rising from 41 basis points to 209 basis points on 3-month money – although in December, the ECB also increased its key interest rate for the first time in two and a half years – and from 63 basis points to 105 basis points on 10-year benchmark yields. The wider interest rate spreads in 2005 supported the US dollar. After fluctuations during the year, the US dollar had appreciated by about 15% against the euro and the yen by the end of 2005.

High-yield bonds continued to attract substantial investments in 2005 and showed a strong year-on-year performance. From March to May, following financial problems at US car companies, corporate bonds experienced a temporary slump which also had an impact on emerging market bonds. Credit spreads rose by over 1 percentage point (BBB rating) but very quickly returned to normal. In Europe, companies seem to have completed their efforts to optimise their balance sheet structures. Increased liquidity, numerous corporate mergers, historically rather low valuations and high dividend yields made European stock markets attractive for international investors (DJ EuroStoxx: +23%). Stock markets in CEE (CECE index: +45%) and the Austrian ATX (+51%), which includes many companies with a CEE focus, were again among the top performers.