A4 für Copyshop GB.indd - Bayerische Landesbank

(Hartz IV) contributed to an overall feeling of despondency. For this reason, it was no
great surprise that 2004 again saw the private households tightening their belts. Stag-
nating consumer demand generated by private households remains a considerable
barrier to sustained economic recovery in Germany. In order for the economy to perk
up, the labour market situation will have to improve significantly, with a concomitant
increase in the level of employment.
The precarious situation of Germany’s public finances saw no improvement in 2004.
The public deficit stood at 3.7 percent in relation to gross domestic product, thereby
clearly breaching the upper limit as stipulated by the Maastricht Agreement for the
third time in a row. The fact that the government deficit remained unchanged despite
an improved economic situation in 2004 was primarily due to two factors. Firstly, if
there had been a stronger upswing driven by domestic demand, the export-driven
rebound in the economy would probably have had a more perceptible effect on the
public coffers. Secondly, the continuing difficulties of the public budget reflect the
extremely high unemployment level. On top of this, income tax was reduced at the
beginning of 2004.
On the capital markets, the year was marked by continued – albeit somewhat leisurely
– recovery of the equity markets, a surprising decline in interest rates in the second
half, and not least by a weak dollar.
The sharp rise in share prices perceptible from spring 2003 stalled at the beginning
of 2004, despite the fact that corporate earnings were on the up, exceeding the origi-
nal expectations of market participants. A series of factors contributing to uncertainty
took centre stage, among them the terrorist attacks in Madrid and heightened fears
for the economy due to the hike in oil prices. This resulted in an increased risk pre-
mium. Towards year-end, the sentiment among investors began to brighten once
more: DAX, the German index of blue chip companies, closed 2004 with a good
7 percent growth.
From summer 2004, the bond markets too were affected by fears for the economy
arising from the massive increase in the price of crude oil. Investors did not interpret
the surge in oil prices as a risk factor for monetary stability, as they had in the past,
but rather as a threat to economic growth.
While the US Federal Reserve had already instigated a turnaround in interest rates
on the money market in summer 2004, and raised the Fed Funds Rate by 1 percent to
2.25 percent at year-end, the European Central Bank maintained a key lending rate of
2 percent over the whole of 2004. It has indicated, however, that its next move is likely
to be an interest rate increase. Moderate interest rate increases are expected from
mid-2005.
Economic situation
23
} Maastricht criteria
breached again
} Moods lift on the
equity market