ANNUAL REPORT 2008 - Polymer Bank Notes of the World

in July, annual inflation in the OECD countriesslowed to 1.5% in December. Excluding foodand energy, consumer prices rose by 2.0% in theyear to December.UNITED STATESIn the United States, economic activitydecelerated markedly in 2008. For the wholeof 2008, real GDP increased at a rate of 1.1%.While there was positive growth in the firsthalf of the year partly due to temporary fiscalstimulus measures and support from foreigntrade, intensifying financial market strains,restrictive credit conditions and weaker foreigndemand all contributed to an outright contractionin output throughout the second half of 2008.Private consumption was negatively affectedby deteriorating consumer sentiment and labourmarket conditions, in addition to a decline inhousehold wealth owing to falling house pricesand equity valuations. At the same time, businessinvestment weakened amid declining corporateprofits, tighter lending standards, as well as thebroadly weakening outlook for demand. Theongoing housing market correction – intensifiedby the financial turmoil – continued to be amajor drag on the economy, with residentialinvestment subtracting 0.9 percentage pointfrom GDP growth in 2008. Foreign trade wasa major contributor to growth throughout mostof 2008, reflecting buoyant external demandearlier in the year and the lagged effects of pastUS dollar depreciation. However, the positivetrade effect faded towards the end of the yearas a sharp economic slowdown in a number ofUS trading partners weighed on foreign demandand exports. Nonetheless, the current accountdeficit narrowed from 5.3% of GDP in 2007 to5.0% on average in the first three quarters of2008, although this improvement was limitedsomewhat by the higher price of oil and othercommodities during most of that period, whichpushed up the average value of imported goodsrelative to the previous year.As regards US price developments, the averageannual rate of change in the CPI for 2008 was3.8%, up from 2.9% the year before. Headlineinflation oscillated in a wider than usual range,reflecting volatility in oil and other commodityprices. CPI inflation was at elevated levels duringthe first half of 2008 and peaked at 5.6% in Julyamid rapidly rising energy costs. Towards theend of the year, the annual rate of change in theCPI fell sharply to 0.1% in December owing tosharp falls in commodity prices and increasingslack in the economy as the recession deepened.Excluding food and energy, annual CPI inflationstood at 2.3% in 2008 (the same as in 2007).The declining trend throughout most of the yearreflected to some extent a deceleration in theowner-equivalent rent component.The Federal Open Market Committee (FOMC)of the Federal Reserve System decreased thetarget for the federal funds rate from 4.25% atthe beginning of 2008 to a range from 0.0% to0.25% by the end of the year. At its meeting inDecember 2008, the Committee anticipated thatweak economic conditions were likely to warrantexceptionally low levels in the policy rate forsome time to come. The FOMC undertook anumber of targeted programmes to enhanceliquidity and provide support to financialmarkets in view of deteriorating conditions.As regards fiscal policy, the federal budgetdeficit widened in the 2008 fiscal year – whichstarted in October 2007 – compared with theprevious year. This stemmed from a combinationof lower tax receipts as the economy slowedand an increase in government spending, partlyreflecting the implementation of fiscal stimulusmeasures. According to estimates from theCongressional Budget Office, the federal budgetdeficit stood at 3.2% in the 2008 fiscal year.JAPANIn Japan, economic expansion ended abruptlyin 2008, with slightly positive growth in thefirst quarter followed by a marked decrease inoverall production thereafter. Strong externaldemand and domestic investment supportedreal GDP growth in the first quarter. However,substantial declines in net exports and businessinvestment – which had been the driving force ofthe Japanese recovery in previous years – alongwith restrained consumption owing to increasingECBAnnual Report200823