General economic trends in 2006
With year-on-year growth of nearly 5% in 2006, the global economy grew at around the same pace as in 2005. The engines of growth were the United States, with GDP up 3.5% in 2006, China, up 10.75%, and the emerging economies of Asia, up 7.0%. However, there was a slowdown during the year, primarily in the United States, in the wake of which GDP growth fell tangibly below the long-term average of 3.25%. The main reasons for this were the weaker fiscal stimuli, the continuing rise in the foreign trade deficit, a significant slowdown in the real estate sector and the serious problems encountered by the U.S. automotive industry. In contrast, Japan is in the midst of a prolonged period of growth. Driven by exports and business capital expenditures, GDP rose by approximately 2.0% in 2006 compared to the previous year.
The upturn in the euro area gained momentum during the past year. At 2.75%, gross domestic product (GDP) rose almost twice as rapidly as in 2005. In this context, the European economy benefited from external demand that remained strong coupled with lively domestic demand. This applies particularly to Germany, where capital spending was joined by private consumption as factors driving growth. For the first time in over a decade, Germany’s GDP growth kept pace with the euro area as a whole. Turning now to the developments in detail:
- At an average of 2.5% in 2006, GDP growth in Germany was significantly higher than the 0.9% recorded in the previous year. This was the biggest rise since 2000, primarily driven by strong growth in capital expenditures by companies.
- German inflation stood at 1.8% after 1.9% in 2005. The year-on-year decline was largely due to the smaller increase in energy prices and prices set by the government.
- Unemployment averaged 4.48 million in 2006 after 4.86 million in the previous year.
- The current account surplus totalled 4.4% of GDP following on from 4.0% in 2005, helping Germany retain its position as the world’s biggest exporter.
- The public-sector deficit fell significantly, from 3.2% of GDP to 1.9%. Hence Germany met the requirements of the European Stability and Growth Pact for the first time in five years.
- Long-term interest rates rose again. At the end of 2006, yields on 10-year German government bonds were at 3.95% after 3.3% in 2005. The European Central Bank raised the refinancing rate from 2.25% at the outset of the year to 3.5% in December 2006.
Sector conditions
The German banking sector enjoyed a good year in 2006 in terms of loan portfolios and total deposits. This trend was driven by continued rapid growth in the global economy coupled with a German economy expanding more rapidly than at any time since 2000 and international financial markets performing strongly. The factors underpinning net interest income created a favourable environment overall for the profitability of German banks. On the lending side, the growth rate for loans in 2006 rose again in the banking sector for the first time since 2002, even if it was still very low compared with the rest of the euro area. The total number of loans and advances increased by around 1% in 2006, after decreasing by an average of 0.6% each year between 2002 and 2005. This can be attributed to high capital spending by German companies and the loans required to fund this investment. In contrast, there was only a slight increase in the demand for credit from private households.
Total deposits grew more rapidly, with the aggregate deposits of non-banks rising by 4.5% in 2006. As with loans and advances, the main factor behind this change was the improved financial situation of companies, which preferred term money to sight deposits in 2006.
The positive contribution to net interest income made by the growth in loan portfolios and total deposits in 2006 was tempered by further pressure on interest margins during the first half of the year. Whereas banks raised their deposit rates appreciably in response to the more restrictive monetary policy pursued by the European Central Bank, long-term credit interest rates initially continued their downward path in the first half of the year. This trend reversed in the second half to almost return to the previous year’s level.
Net fees and commissions’ contribution to the earnings situation of German banks benefited chiefly from the very friendly financial market environment in 2006. Greater activity on the capital market again resulted in much higher trading volumes on German stock exchanges in 2006. This development was reinforced by very strong demand from institutional investors. The DAX rose by over 20% year-on-year for the second time in a row, thus creating a very favourable environment for the funds business and trading profit of German banks.
Risk provisioning developed relatively well in 2006, at least as far as the corporate sector is concerned. There was a further decline in the number of company insolvencies, whilst personal bankruptcies continued to increase.
