- The world economy continued to pursue a stable course of long-term expansion in 2006, supported by the strongly performing economies in the Far East, especially China. For the third year in succession, global economic growth was around 5 % in real terms. Cyclical movements superimposed on this structural trend largely offset each other: in the US, as a result of measures aimed at correcting the overvaluation in the real estate sector, housing construction investment declined sharply and domestic demand weakened significantly in the second half of the year; in the euro area, the upswing that started in the export-driven industrial sector gained further momentum. Rising levels of capacity utilisation stimulated investment in equipment. The labour market situation and consumer sentiment improved visibly as the year progressed. In 2006, economic growth in the euro area reached 2.8 %, the highest level seen in several years.
While the world economy expanded strongly, commodities markets were characterised by limited supply. Various geopolitical crises, supply bottlenecks due to technical factors as well as speculative influences pushed up crude oil prices to new highs in May and August (8 August: 83 US$/bl); later on, prices fell to around 60 US$/bl. This gave rise to temporary expectations of higher inflation. Ultimately, however, second-round effects were moderate – not least as a result of price and wage pressure caused by competition from emerging markets.
- The cyclical shift between the US and the euro area was reflected in divergent monetary policies: in mid-2006, US markets expected the upward movement of interest rates to come to an end after 17 increases, and started to speculate about the timing for the first interest rate reduction. The ECB consistently reversed its expansionary monetary policy by raising its key interest rate in five steps of ¼ % each in 2006. Short-term euro interest rates rose steadily throughout the year – on three-month money by 123 basis points to 3.66 % p.a. The interest rate differential between the euro and the US dollar gradually narrowed, contributing to the US dollar’s depreciation of 10 % against the euro in the course of the year. Long-term yields rose strongly in the first few months of 2006 and then declined in the second half of the year, reflecting the up-and-down movement of inflationary expectations and the reinvestment of current account surpluses achieved by oil-exporting countries and countries in the Far East. As a result of these developments, the yield curve in the euro flattened. The maturity spread between long-term yields and money markets, which widened until May to exceed 1 percentage point, disappeared by the beginning of December, with an impact on income from maturity transformation and on the scope for lending terms.
It was only in May and June 2006 that financial markets experienced an abrupt withdrawal from high-risk asset classes. Previously, European shares, emerging markets equities and commodities including gold had reached excessively high levels, driven by surplus liquidity and diversification of investments. This one-month period of weakness led to a market correction. Emerging markets were affected the most, and to a lesser extent CEE stock markets. In the rest of 2006, and until the end of February 2007, stock markets recovered to reach new highs, on the fundamental basis of profit growth and improvements in the balance sheet structure achieved by large companies over the past few years. This also benefited the credit segments: following a temporary increase around the middle of the year, CDS spreads fell to new lows. The high-yield sector, including emerging markets bonds and also corporate bonds, again significantly outperformed the benchmarks recently.