ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Corporate investment, which had expanded at abrisk pace in 2007, reflecting strong profitabilityand high capacity utilisation rates, also slowedmarkedly in 2008, contracting in the secondhalf of the year after a dynamic first half. Thisreversal in corporate investment resulted tovarying degrees from weakening demand andthe ensuing waning capacity pressures, fromreduced profitability owing to the incompletepass-through of the commodity price shock inthe first part of the year and to the surge in unitlabour costs over the course of the year, andfrom tighter lending standards.The tightening of financing conditions,which had been ongoing since the start ofthe financial turmoil, accelerated abruptly inSeptember 2008, pushing the cost of marketbasedfinance considerably higher, as well asthe overall real cost of finance (an aggregatemeasure combining the costs of market debt,equity and bank-based finance). Nonetheless,the proportion of firms citing financing asa factor limiting production remained lowin 2008. This was largely due to the factthat the impact of tighter credit conditionstends to appear with a lag, because firmscan rely on previously committed creditlines, and that internally generated fundsremained at a high level. In addition, theproportion of industrial firms identifying alack of equipment or space as a factor limitingproduction decreased sharply after peaking inthe third quarter of 2007, while the utilisationrate of industrial capacity returned to itslong-term average in October 2008. Firmsalso faced heightened uncertainty concerningthe economic outlook, as evidenced by theexceptional volatility of financial markets,particularly in the last few months of 2008,and by the unusually wide dispersion of GDPforecasts in the ECB Survey of ProfessionalForecasters for the fourth quarter of 2008.Growth in euro area exports slowed downmarkedly in 2008, to an annual rate of around1.8%, compared with 6.0% in 2007, and turnednegative over the last three quarters of theyear. The external environment deterioratedsignificantly in 2008, aggravated by the financialcrisis, with growth slowing in advancedeconomies and emerging markets becomingincreasingly affected. During the last few monthsof the year, various survey indices on industrialexport orders or order books fell to historicallylow levels. Euro area imports also slowed in2008, reflecting sluggish domestic demand. Nettrade had a neutral impact on growth in 2008,following two years of positive contributions,with the strongly negative figures in the secondhalf of the year offsetting the positive figuresrecorded in the first half and carry-over effectsfrom 2007.From a sectoral perspective, the slowdownin activity was broadly based, although moremarked in the industrial sector, which tendsto display greater sensitivity to economiccycles. Manufacturing activity fell abruptly inthe second half of the year, in particular withregard to capital goods, which suffered fromweaker external demand, a rapid depletion oforder backlogs and sharp cuts in activity in thecar industry. Construction continued to be veryweak, despite a temporary boost in the firstquarter owing to good weather conditions, witha steady deterioration in the residential sectorwhich was particularly severe in some countries.Although more resilient, services grew at theirslowest pace since 2004, against the backgroundof weak private consumption and slackeningbusiness activity.DECLINE IN THE LABOUR MARKETConditions in the euro area labour marketworsened in 2008, after two years of substantialimprovements.Over the previous few years, euro area labourmarkets had performed very positively,with strong increases in employment, risingparticipation levels and low unemployment rates,the latter reaching in early 2008 the lowest levelsince the 1980s (7.3%). Thus, by the end of 2007labour markets were particularly tight and wagepressures were beginning to rise. However, thesetrends were reversed in the course of 2008, withemployment contracting in the second half ofECBAnnual Report200865