Overall economic development

The first half of 2013 in Europe was marked by political setbacks and the ongoing euro debt crisis. The threat of political stalemate in Italy, together with the prospect of national bankruptcy in Cyprus – that was only averted at the last minute after much argument – triggered enormous uncertainty among market participants, particularly at the beginning of the year. As a result, gross domestic product (GDP) in the Eurozone fell in the first quarter of 2013 by 0.2%. In the second quarter, the Eurozone’s economy grew again for the first time since the end of 2011, increasing by 0.3% over the previous quarter. This was due in part to strong growth in Germany (+0.7%) and France (+0.6%). In the third quarter, the Eurozone only achieved moderate economic growth of 0.1%. The recession seemed to be over, yet for 2013 as a whole Eurozone GDP contracted by 0.4%.

Germany’s GDP stagnated in the first quarter of 2013, after decreasing by 0.5% in the fourth quarter of 2012. The Ifo business climate index, one of the Eurozone’s most respected economic indicators, rose to 109.5 points in December 2013, its highest level since April 2012.

    2013 1) 2012
  USA +1.9 +2.8
  Eurozone –0.4 –0.7
  Germany +0.4 +0.7
  United Kingdom +1.4 +0.1
  Japan +1.7 +1.5
  1) Bloomberg consensus forecasts as at 16 January 2014; 2013: provisional figures

Growth in GDP in the UK in the first quarter of 2013 was an unexpected 0.5%. In the second and third quarters the economy recovered further, with each quarter growing by 0.8% over the previous quarter.

The US economy was generally robust in 2013. Economic performance was relatively strong, particularly in the second half of the year. In the third quarter it recorded growth of 4.1%, the biggest increase since the first quarter of 2012. At the same time, unemployment fell over the year from 7.9% to a five-year low of 6.7%.

The major central banks continued to pursue expansionary monetary policies. In Europe, the European Central Bank (ECB) lowered its prime rate in the second quarter of 2013 by 25 basis points to 0.5%. In a move that few expected, it once again cut prime rates in November – to a record low of 0.25%. At the same time, the ECB extended its policy of providing unlimited liquidity to the banking sector, and plans to continue making this available until mid-2015. The Bank of England linked its prime rate to the unemployment rate, and the US Federal Reserve (Fed) announced in December that from  January 2014 onwards it would reduce monthly bond purchases by USD 10 billion. It reaffirmed at the same time that it would continue to leave prime rates at nil, even if the US unemployment rate were to fall below 6.5%.

Expansionary monetary policy is supported by moderate inflation rates. In the Eurozone, the inflation rate fluctuated in the first quarter of 2013 between 1.7% and 2.0%, and in December fell to a low of 0.8%. In the UK, inflation hovered around 2.7% throughout the year, but dropped back to 2.0% at the end of the year. Inflation rates also fell in the US during the year – from 2.0% in February to 1.2% in November.