World economy slows due to financial market crisis

The world economy continued to expand in the first nine months of 2008, though at a slower pace than in the previous year and with large regional variations. Whilst growth in emerging markets remained robust on the whole, the economy in the industrial nations deteriorated notably. The financial market crisis reached its peak in September when Lehman Brothers, a major US investment bank, collapsed. Some other significant financial institutions could only be saved through government intervention or takeover by competitors.

In the United States, the housing market crisis, weak financial markets and high oil prices have put the brakes on growth. In a concerted action with other key central banks, the US Federal Reserve reacted to the increased risk for the economy and the financial markets by lowering its key interest rate by an additional 0.5 percentage points to 1.5% on 8 October 2008. This brings the total cuts in the key interest rate this year to 3.25 percentage points.

In China, growth in the gross domestic product (GDP) declined to 9.0% in the third quarter. Nevertheless, it averaged out at 9.9% in the first nine months of 2008. In Japan, after a good start to the year, the second quarter suffered a strong economic blow. GDP shrank by 0.7% over the preceding quarter and may have recovered slightly in the third quarter, if at all.

In the third quarter, the relevant indicators confirmed that the euro zone economy has continued to soften. The real economies are also in danger of being caught up in the turbulence affecting the financial markets. At the same time, inflation risk has waned as a result of the falling price of oil. In this environment, the European Central Bank saw sufficient leeway to participate in the internationally co-ordinated interest rate reductions. On 8 October 2008, the ECB cut its key interest rate by 0.5 percentage points to 3.75%. This was the first reduction in more than five years.

In Germany, economic indicators also continued to weaken during the course of the year. The Ifo business climate index fell sharply in the third quarter and GDP will barely have surpassed stagnation levels. An even further decline is conceivable, which would mean that Germany entered a recession in the summer months.