BI Annual Report en 009

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Annual ReportAbridged Version

Ordinary Meeting of Shareholders

Rome, 31 May 2010

116th

FinancialYear

2009

116thfinancial

year


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Annual ReportAbridged Version

Ordinary Meeting of Shareholders2009 - 116th Financial Year

Rome, 31 May 2010


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Banca dItali a, 2010

Address

Via Nazionale, 91

00184 Rome - Italy

Telephone

+39 0647921

Website

www.bancaditalia.it

All rights reserved. Reproduction for academic and non-commercial use is permitted,provided that the source is acknowledged.

ISSN 1972-845X

Printed by the Printing Office of the

Bank of Italy, Rome, August 2010

The statistical appendix to the Abridged Report is available on the Bank of Italys website


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BANCA DIALIA Abridged ReportIII2009

CONTENTS

THE INTERNATIONAL ECONOMY

1. Economic developments and policies in the main countries and areas 3

Te United States 4

Japan 8

Te European Union 9Te main emerging countries: China, India, Brazil and Russia 10

2. e fnancial and oreign exchange markets 14

Te fnancial and oreign exchange markets in the industrial countries 14

Te fnancial and oreign exchange markets in the emerging countries and new EUmember countries not part o the euro area 18

3. World trade and payments balances 19

World trade 19

Commodity prices 20

Balance-o-payments disequilibria 21

4. THE G20 AND INTERNATIONAL ECONOMIC COOPERATION 24

Increase in the international fnancial institutions resources and reorm o theirlending instruments 24

Strengthening o international cooperation and reorm o the fnancial system 26

MACROECONOMIC DEVELOPMENTS, BUDGETARY POLICIESAND MONETARY POLICY IN THE EURO AREA

5. Macroeconomic developments 31

Te euro area 31Prices and costs 34

Employment 38

Te balance o payments 38

6. Budgetary policies 41

7. e common monetary policy 46

Interest rates and the exchange rate o the euro 47

Money and credit 49

Unconventional monetary policy operations 50


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BANCA DIALIAAbridged Report

2009IV

THE ITALIAN ECONOMY

8. Demand, supply and prices 57

Te transmission o the global recession to the Italian economy 57Household consumption 58

Investment 61

Exports and imports 63

Supply 64

Prices and costs 65

9. e labour market 68

Employment and labour input during the crisis 68

Te composition o employment 71

Unemployment and the labour supply 72

Earnings and labour costs 74Personal distribution o earnings and household income 77

10. e productive structure and structural and territorial policies 79

Sectoral and territorial dynamics 79

Firms and anti-crisis policies 80

Te crisis and economic growth 81

Te regulatory ramework 82

Public services and business activity 83

11. Italys energy system 85

Energy supply and transormation 85

Energy demand 86

Te prices o energy products 87

Energy policies to curb greenhouse gas emissions 88

12. e balance o payments and the net international investment position 91

Te current and capital accounts 92

Investment 94

Te net international investment position 95

13. e public fnances 97

Budgetary policy or 2009 98

Net borrowing 102

Revenue and expenditure 103

Local government 107

Te borrowing requirement and the debt 109

Budgetary policy or 2010 112

Programmes and prospects or 2011-12 114

Reorms and the public fnances 115

14. e fnancial condition o households and frms 117

Households fnancial saving and debt 117

Te conditions and fnancial choices o frms 123


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BANCA DIALIA Abridged ReportV2009

15. e fnancial markets 130

Public sector securities 130

Corporate bonds and bank bonds 132

Te equity market 134

BANKS AND NON-BANK INTERMEDIARIES

16. e Italian fnancial system in 2009 141

Developments over the year 141

Te structure o thr Italian fnancial system 142

17. e activity o banks an fnancial intermediaries 146

Assets 146

Funding and liquidity management 149

Risks 150

Proftability 152

Capital 153

Stress tests on the Italian banking system: credit and market risks 154

Te activity o non-bank intermediaries 155

18. Institutional investors 157

Investment unds 158

Individual portolio management 161

Insurance companies 161

Pension unds 163

19. Supervision 166

International cooperation 166

Te reorm o supervision in the European Union 169

Italian legislation 170

Supervision o banks 173

Supervision o non-bank intermediaries 176

Crisis procedures or banks and non-bank intermediaries 178

Consumer protection, fnancial education and anti-money-laundering controls 179

Sanctions 182

THE PAYMENT SYSTEM, THE MARKETS AND THEIR INFRASTRUCTURES

20. e large-value payment system, money market and fnancial market inrastructures 185

Settlement in central bank money 186

Te interbank deposit market 189

Te wholesale market in government securities 190

Te Continuous Linked Settlement (CLS) system 191

Central depository, settlement and guarantee systems 192

21. Retail payment services and the state treasury service 194

SEPA and the integration o European retail payment services and systems 194

Payment instruments 195

Te State treasury service and public payments 198


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2009VI

SYMBOLS AND CONVENTIONS

In the ollowing tables:

the phenomenon in question does not occur

.... the phenomenon occurs but the value is not known

.. the value is known but is nil or less than hal the fnal digit shown

THE GOVERNORS CONCLUDING REMARKS

Te evolution o the crisis and international cooperation 203

Lessons rom the crisis 204

Te euro area 206Te Italian economy 207

Competitiveness and growth 209

Banks, supervision 211

THE BANK OF ITALYS ANNUAL ACCOUNTS

22. Management report and annual accounts 217

Management report 218

Te Banks institutional structure 218

Organizational developments 218

Human, logistical and I resources 219Expenditure control 220

Note issue 221

Financial resources 222

Financial risks 224

Risks associated with new types o operations 226

Internal audit and operational risk 227

Environmental policy and workplace saety 227

Highlights o the annual accounts 228

Post-balance-sheet events 230

Annual accounts 231

Notes to the accounts 235

Legal basis, methods o preparation and layout o the annual accounts 235

Comments on the items o the balance sheet 241

Comments on the items o the proft and loss account 252

Proposals o the General Council 258

23. Documentation attached to the annual accounts 259

Report o the Board o Auditors 259

LIST OF ABBREVIATIONS 261


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THE INTERNATIONAL ECONOMY


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BANCA DIALIA Abridged Report32009

1. ECONOMIC DEVELOPMENTS AND POLICIES IN THEMAIN COUNTRIES AND AREAS

World output contracted by 0.6 per cent in 2009, as the sharp all o 3.2 per centin the advanced economies was not quite oset by the gain o 2.4 per cent, modestby comparison with the pre-recession years, recorded by the emerging and developingcountries. Te latters share o world GDP, at purchasing power parity, is now nearly 50

per cent, 10 percentage points more than in 2000.Te data available or the frst ew months o 2010 indicate considerable diversity

o national economic trends. Robust growth in the emerging economies, actuallyhigher in Asia than beore the recession, contrasts with slower growth in the UnitedStates and Japan and hesitant recovery in the United Kingdom and the euro area.Te leading international institutions orecast that this situation will continue orthe rest o this year. While or the emerging economies the main risk is a resurgenceo pressure on the prices o goods and fnancial and real assets, or the advancedeconomies the main concerns are persistent high unemployment and the mountingpublic debt.

he recession aected virtually all the advanced countries. Ater contractingin the irst six months o 2009, economic activity returned to expansion in thesecond hal, beneiting rom the support o monetary and iscal policies and thegradual improvement o conditions in the inancial markets, which was assistedby oicial intervention on behal o the segments and intermediaries worst hit bythe crisis.

Te emerging and developing countries responded to the crisis in diverse ways. Inthe countries o central and eastern Europe, including the new non-euro EU members,economic activity ollowed the same pattern as in the advanced economies, a frst-halcontraction ollowed by modest recovery in the latter part o the year. In the emergingcountries o Asia, led by China and India, which the recession had aected chiey

through the reduction in oreign demand, recovery began sooner than in the rest othe world, with a return to rapid GDP growth as early as the spring, thanks above allto massive fscal stimulus and the easing o monetary conditions. In Brazil, with itsrelatively sound fnancial system and diversifed productive economy, domestic demandheld up and the contraction in output was short-lived, while in Russia economicactivity collapsed owing to the dominance o the energy sector and the drying-up ooreign fnance.

In 2009 and the early months o this year, the advanced countries maintainedstrongly expansionary monetary policy stances. Reerence rates remained unchangedat very low levels. Te Federal Reserve, the Bank o England and, more recently, theBank o Japan took unconventional measures to hold long-term rates low. By contrast


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the emerging and developing countries, where the pace o the economic expansion hasregained or surpassed the potential growth rate, as in China, India and Brazil, beganto take a less accommodating monetary policy stance in the frst ew months o 2010.

Fiscal policies gave strong impetus to growth in 2009 and continue to do so thisyear. In the G20 economies, crisis-related discretionary fscal stimulus amounted toabout 2 percentage points o GDP in 2009 and 1.9 points this year, according to thelatest IMF estimates. In the advanced economies general government net borrowingswelled, reecting not only discretionary countercyclical measures but also the

working o built-in stabilizers and a deterioration in structural balances (see the boxTe public fnances in selected advanced countries, Economic Bulletin, No. 56, April2010). Te abrupt deterioration in the public fnances has uelled uncertainty overtheir sustainability, as is shown by the strains in the government securities markets insome euro-area countries in the early months o this year. o avert the risk, a numbero countries have set adjustment strategies to correct the cyclically adjusted primary

balance beginning in 2011. According to the IMF the correction will involve mainlythe advanced economies and should amount to about 3.5 percentage points o potentialGDP rom 2010 through 2015.

Fiscal policy support was substantial in the emerging countries as well, especiallyChina, but the worsening o the public fnances has not been a source o concern,thanks both to sounder budgetary situations than in the past and to these countriesswit return to rapid economic growth.

Te United States

Output in the United States ell by 2.4 per cent in 2009, the worst perormance insixty years (able 1.1). Te contraction in activity was concentrated in the frst hal o theyear and was due chiey to sharp declines in non-residential fxed investment, exportsand inventories. Te economy returned to growth in the months ollowing, assisted bythe inventory cycle and the recovery in investment in machinery and sotware.

Household consumption expanded moderately during the year, recouping onlypart o the steep all registered in the second hal o 2008. Te upswing in the savingrate that had marked 2008 came to an end, owing among other things to the lowlevel o interest rates. Teir impact more than counterbalanced that o the tightening

o the supply o consumer credit and the modest recovery in household net wealth,whose ratio to disposable personal income rose by 15 percentage points during the year thanks above all to the stock market recovery ollowing the plunge o about 130points in 2008.

Non-residential fxed investment diminished by nearly 18 per cent. Presumablyone cause was the bank credit tightening that lasted throughout the year. Tis had astronger eect on investment by small frms which, unlike the larger corporations, wereunable to turn to the capital markets.

Residential investment declined by more than one fth in 2009, year on year, butit turned upwards in the second hal ater more than three years o contraction.


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Non-arm payroll employment ell by over 4.7 million during the year, and bythe end o the year the unemployment rate had reached 10 per cent (rom 7.4 percent twelve months earlier). Te rise in unemployment was most pronounced amongthe less well-educated segments o the working-age population. Te long-term unem-

ployed those out o work or at least 27 weeks made up 40 per cent o the total,some 20 points more than at the end o 2008.

According to preliminary data, in the frst quarter o 2010 GDP grew at an annualrate o 3.2 per cent, continuing to beneft rom the rebuilding o inventories and theresumption o investment in machinery and sotware. Private consumption acceleratedto growth o 3.6 per cent, while the saving rate ell to 3.1 per cent (rom 3.9 per cent inthe ourth quarter). In the frst our months o the year non-arm payroll employmentimproved markedly, adding 570,000 jobs by comparison with the end o 2009.

Core ination, net o energy and ood products, ell rom 1.7 per cent in January 2009 to 0.9 per cent in April 2010. A contributing actor was housing

Table 1.1

Gross domestic product, demand and infation in the leading industrial countries(percentage changes)

2007 2008 2009 2009 2010

Q1 Q2 Q3 Q4 Q1

United States

GDP (1) 2.1 0.4 -2.4 -6.4 -0.7 2.2 5.6 3.2

Domestic demand (1) 1.4 -0.7 -3.4 -8.6 -2.3 3.0 5.2 3.8

Ination (2) 2.9 3.8 -0.4 .. -1.2 -1.6 1.4 2.4

Japan

GDP (1) 2.4 -1.2 -5.2 -15.9 7.4 0.5 4.2 4.9

Domestic demand (1) 1.3 -1.3 -4.0 -13.2 -0.2 -1.0 1.7 2.3

Ination (2) 0.1 1.4 -1.4 -0.1 -1.0 -2.2 -2.0 -1.2

European Union

GDP (1) 2.9 0.7 -4.2 -9.4 -1.0 1.1 0.4 0.7

Domestic demand (1) 2.9 0.7 -4.0 -9.7 -3.2 1.5 -0.1 ....

Ination (2) 2.4 3.7 1.0 1.6 0.9 0.4 1.0 1.7

United Kingdom

GDP (1) 2.6 0.5 -4.9 -10.0 -2.7 -1.1 1.8 0.8

Domestic demand (1) 3.0 0.1 -5.3 -9.3 -3.9 -0.3 3.1 ....

Ination (2) 2.3 3.6 2.2 3.0 2.1 1.5 2.1 3.3

Canada

GDP (1) 2.5 0.4 -2.6 -7.0 -3.5 0.9 5.0 ....

Domestic demand (1) 4.1 2.6 -1.7 -7.4 0.3 5.6 4.6 ....

Ination (2) 2.1 2.4 0.3 1.2 0.1 -0.9 0.8 1.6

Advanced economies

GDP (4) 2.8 0.5 -3.2 .... .... .... .... ....

Memorandum item:

World output (4) 5.2 3.0 -0.6 .... .... .... .... ....

Sources: ECB, IMF and national statistics.(1) Volumes at chain-linked prices; quarterly changes on previous quarter at an annual rate. (2) Consumer price index; for quarterlydata, changes on the corresponding quarter of the previous year. (3) For Canada, domestic nal demand. (4) Weighted average,weighted by GDP at purchasing power parity, of the growth rates of the economies included in the aggregate.


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In the 2009 fscal year ending last September, the ederal budget defcit increasedto 9.9 per cent o GDP (compared with 3.2 per cent in 2008). A number o actors

were at work: the pronounced worsening o the structural balance, the operation o

built-in stabilizers, the American Recovery and Reinvestment Act (see the box Teanti-crisis fscal measures in the main advanced and emerging countries, EconomicBulletin, No. 52, January 2009), and action to support the fnancial system. Accordingto the Congressional Budget Oce, the Recovery and Reinvestment Act in particularincreased the defcit by about 1.4 percentage points o GDP in 2009 and shouldincrease it by 2.8 points in 2010.

In February the Administration presented a budget plan that according to theCBO represents a partial defcit adjustment. Te ederal defcit is projected to declinerom 10.3 per cent o GDP in 2010 to 4.1 per cent in 2014, then stabilize at between 4and 5.6 per cent or the rest o the decade (see the box Te public fnances in selectedadvanced countries, Economic Bulletin, No. 56, April 2010). Te IMF projects a rise

in US general government gross debt rom 83.2 per cent o GDP at the end o 2009 to97.4 per cent at the end o 2011 (Figure 1.2).

Figure 1.2

General government net borrowing(percentage of GDP)

-2

0

2

4

6

8

10

12

14

-2

0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

United States United Kingdom Canada

Euro area Japan

General government gross debt(percentage of GDP)

0

10

20

30

40

50

60

70

80

90

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

150

160

170

180

190

200

210

220

230

240

250

United States United Kingdom

Canada Euro area

Japan (right-hand scale)

Source: IMF, World Economic Outlook, April 2010.


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Te real estate market crisis. Te US housing market showed signs o stabilizingin 2009 and early 2010. Between December 2008 and February 2010 the Case-Shillerindex covering the ten largest metropolitan areas ell by 3 per cent, compared with the

28 per cent drop between mid-2006 and the end o 2008. Case-Shiller index uturescurrently indicate that prices will stagnate or the rest o the year.

Te Federal Reserve and the reasury have continued their resolute action tocounter the market crisis. Te Fed, through purchases o mortgage-backed securitiesguaranteed by government-sponsored entities, has helped to stabilize the rate onconventional 30-year mortgage loans at around 5 per cent, progressively narrowing thespread over 30-year reasury bonds to exceptionally low levels. Te reasury has easedits standards or access to refnancing, enabling some 4 million debtors to refnancetheir debt at lower interest rates. It has also promoted the renegotiation o mortgagesdeemed to be at risk o deault. Even so, o the original objective o 4 million mortgages(about 8 per cent o all those outstanding), by April 2010 only 295,000 had undergone

permanent contractual modifcations, and another 640,000 were being renegotiated.Te commercial real estate crisis has worsened. Te Moodys price index or our

types o commercial property (oce, apartment buildings larger than our units,industrial, retail) plunged by about 30 per cent in 2009. Te continuing rise in thecommercial property vacancy rate signals that demand is still alling.

Te volume o bank credit available to this market continued to contract throughout2009. In order to ease the unding diculties o the sector whose liabilities amountedto some $3.5 trillion at the end o the year, equivalent to two thirds o the value ohouseholds home mortgages the Federal Reserve extended to investors in commercialmortgage-backed securities the possibility o access to the erm Asset-Backed SecuritiesLoan Facility that it had introduced at the end o 2008.

Japan

Gross domestic product diminished by 5.2 per cent last year (able 1.1). All othe contraction occurred in the frst quarter, when output ell at a 15.9 per cent annualrate. Economic activity began to grow again in the last three quarters, led by a stronggain in exports. Exports to Asia, which account or more than hal o total Japaneseexports, increased by nearly 50 per cent at current prices between the frst and theourth quarter and thus recouped a good part o the loss recorded between the frst hal

o 2008 and the frst quarter o 2009. Consumer spending, stimulated by incentives orthe purchase o durable goods, also contributed. According to preliminary estimates,economic activity maintained its robust expansion in the frst quarter o 2010 (at a 4.9per cent annual rate), continuing to rely mainly on the vigorous growth o exports ogoods and services (30.5 per cent).

Te economic recovery has produced a slight improvement in labour marketconditions. Te unemployment rate, which had risen to 5.6 per cent in July, came backdown to 5 per cent in March 2010 but is still about 1 percentage point higher than it

was during the frst hal o 2008.

Deationary tendencies have reappeared. Te twelve-month rate o change inconsumer prices net o energy and ood products turned negative in January 2009 and


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continued to all throughout the year, to a low o minus 1.2 per cent in December.In the frst ew months o 2010 it has steadied at around minus 1 per cent. Te Banko Japan responded by maintaining its strongly expansionary monetary policy stance,

leaving its reerence rate unchanged at 0.1 per cent. Also, in December 2009 it beganproviding three-month fnancing at a fxed rate o 0.1 per cent, with a view to bringinglong-term rates down; this acility was reinorced in March and will eventually total20 trillion, about 4 per cent o Japans GDP. Finally, the Bank recently announced aacility or twelve-month fnancing at a fxed rate equal to the reerence rate; details onthe acility have yet to be fnalized.

According to the latest IMF estimate, Japanese general government net borrowingrose to 10.3 per cent o GDP in fscal 2009. In 2010 and 2011 it should come downvery slightly (Figure 1.2). General government gross debt, by this estimate, will cometo more than 230 per cent o GDP at the end o 2011.

Te European Union

Te United Kingdom. Economic activity contracted by nearly 5 per cent lastyear, stabilizing only in the ourth quarter. Consumption diminished by 3.2 per cent,playing a greater role than in other advanced economies in the all in GDP. Businessinvestment continued to decline throughout the year, suering rom diculty inobtaining bank credit that was only partly oset by recourse to the capital market.Te all in residential investment, under way or nearly three years now, accountedor about 0.6 percentage points o the decline in economic activity. Tere have beensigns o stabilization in the real estate market, with a recovery in house prices (which

rose 11 per cent in the twelve months to April 2010) and an easing in the supplyo secured credit to households. Te ination rate responding among other thingsto the temporary reduction in VA between December 2008 and December 2009 uctuated widely during the year and early in 2010. In April it stood at 3.7 per cent.

During the year the Bank o England made its monetary policy stance still moreexpansionary, supplementing the decision to hold the policy rate at 0.5 per cent with aquantitative target or purchases o medium/long-term securities fnanced by creationo central bank reserves. Te Bank steadily raised this target rom 75 billion in Marchto 200 billion in November (equivalent to 14 per cent o GDP). Te target was metin January. Unlike the Federal Reserve, the Bank o England bought almost exclusivelyreasury gilts.

In the 2009-2010 fscal year, ended on 5 April, the public sector borrowingrequirement, excluding the temporary eects o fnancial interventions, rose to 11.8per cent o GDP (rom 6.7 per cent in 2008-09). Te reasury reports a seriousdeterioration in the structural requirement, as a consequence o a permanent reductiono about 5 percentage points in potential GDP and a reduction in tax receipts bothrom the fnancial industry and rom the real estate sector.

Te new European Union members. In the eight new EU member countries notpart o the euro area, GDP contracted by 3.4 per cent in 2009, compared with growth o3.9 per cent in 2008 (able 1.2). In the frst hal o the year the tightening o the termsor external fnancing, the decline in consumer confdence and the diminishing growth


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prospects resulted in a sharp decline in domestic demand, which was accompanied by aall in exports. In the second hal GDP returned to growth in nearly all these countries,uelled by the recovery in exports and the gradual improvement in domestic demand.

Table 1.2Main macroeconomic indicators or the new EU members

not in the euro area(percentage changes, unless otherwise indicated)

GDP Consumerprices

(1)

Balance oncurrent account

(2)

Externaldebt

(2) (3)

Govt. budgetbalance

(2)

Publicdebt(2)

2008 2009 2008 2009 2008 2009 2009 2008 2009 2009

Bulgaria 6.0 -5.0 12.0 2.5 -24.0 -9.4 116.5 1.8 -3.9 14.8

Czech Republic 2.5 -4.2 6.3 0.6 -0.7 -1.1 45.1 -2.7 -5.9 35.4

Estonia -3.6 -14.1 10.6 0.2 -9.4 4.6 130.9 -2.7 -1.7 7.2

Hungary 0.6 -6.3 6.0 4.0 -7.0 0.2 172.8 -3.8 -4.0 78.3

Latvia -4.6 -18.0 15.2 3.3 -13.0 9.4 159.6 -4.1 -9.0 36.1

Lithuania 2.8 -14.8 11.1 4.2 -11.9 3.8 88.6 -3.3 -8.9 29.3

Poland 5.0 1.7 4.2 4.0 -5.1 -1.6 64.3 -3.7 -7.1 51.0

Romania 7.3 -7.1 7.9 5.6 -11.6 -4.5 71.8 -5.4 -8.3 23.7

Total 3.9 -3.4 6.6 3.7 . . 82.2 -3.6 -6.6 45.2

Sources: Based on data from Eurostat and Joint BIS-IMF-OECD-WB External Debt Hub.(1) Harmonized Index of Consumer Prices. (2) As a percentage of GDP. (3) Gross.

Te weakness o economic activity and the all in ood and energy prices hel-

ped to curb inationary pressures, and annual ination came down rom 6.6 to 3.7per cent. Te lower ination and the appreciation o currencies against the euro star-ting in March enabled the central banks o the countries with ination targets (CzechRepublic, Hungary, Poland, and Romania) to relax monetary conditions with successi-ve reductions in their policy rates.

Te public fnances worsened in all these countries except Estonia, which cut itsdefcit rom 2.7 to 1.7 per cent o GDP. In Hungary adjustment measures as part o thecountrys undertakings with international fnancial institutions succeeded in stabilizingthe defcit. Te worsening Polish and Czech defcits reected governmental decisionsto allow built-in stabilizers to operate.

Owing to the steep decline in domestic demand, the balance-o-payments defciton current account diminished appreciably in all the countries except the CzechRepublic, where it was nevertheless relatively small.

Te main emerging countries: China, India, Brazil and Russia

China. Economic activity again expanded rapidly last year, at a pace o 8.7 percent (able 1.3), somewhat below the average or the decade (10.3 per cent). Aterlosing speed in late 2008, the economy regained vigour as early as the spring o 2009,thanks to powerul fscal and monetary stimulus.


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Table 1.3

Main macroeconomic indicators or China, India, Brazil and Russia(percentage changes, unless otherwise indicated)

GDP Consumerprices Balance on currentaccount(1)

Budgetbalance(2)

2008 2009 2008 2009 2008 2009 2008 2009

China 9.6 8.7 5.9 -0.7 9.4 5.8 -0.4 -3.0

India 7.4 6.4 8.4 10.9 -2.2 -2.1 -7.9 -10.5

Brazil 5.1 -0.2 5.7 4.9 -1.7 -1.5 -1.4 -3.3

Russia 5.6 -7.9 14.1 11.7 6.2 3.9 4.3 -6.2

Sources: IMF and national statistics.(1) As a percentage of GDP. (2) Consolidated public sector, balance as a percentage of GDP in the relevant scal year.

On average or the year the contribution o net exports was negative or the frsttime since 1995, reducing GDP growth by 4.1 percentage points, while investmentcontinued to be the main driver o growth (8.2 points), thanks in part to the plan omajor public inrastructural works. Consumption grew by 9.3 per cent, aster than theaverage or the decade, uelled by government incentives or the purchase o durablegoods and by income support measures. Car sales in particular rose by 60 per cent,compared with 25 per cent in 2008.

Te rapid growth o the Chinese economy in the last decade has been poweredmainly by capital ormation and exports. In 2008 consumption accounted or justover 35 per cent o GDP, about 10 points less than in 2000. Tis reected both thediminishing ratio o households disposable income to GDP (rom 64 per cent in 2000to 59 per cent in 2007) and their high and rising savings (22.2 per cent o GDP,compared with 17.5 per cent in 2000).

A number o actors are behind the rise in the household saving rate. In urban areasreal disposable income has doubled in a decade, permitting households, especially themore auent, to set more resources aside. Second, the proportion o people o workingage in the population has increased (rom 70 per cent in 2000 to 73 per cent in 2008).Going orward, in the absence o corrective public action the lack o public servicesand adequate social saety nets will keep the saving rate high. Urban households, whosenumber will continue to rise, are obliged to save against the growing costs o housing,education, health insurance and retirement provision. Only a signifcant increasein social expenditure (which now amounts to scarcely 5 per cent o GDP) and thedevelopment o the fnancial and insurance markets can create the conditions or adecline in the saving rate.

Consumer price trends reect international energy and oodstu prices. Onaverage or the year consumer prices declined by 0.7 per cent, ater a rise o 5.9 percent in 2008. Te upturn in the latter part o 2009 and the frst ew months o 2010has been due to higher ood prices. Core ination has returned to positive territory (0.7per cent in April).

Unlike the other emerging countries, China registered an appreciable accelerationin credit. Te largest banks, which are still state-controlled, were called on to expand


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credit to fnance the inrastructure projects envisaged by the fscal stimulus plan. Banklending grew by 31.7 per cent in 2009, bring the outstanding stock to 127 per cent oGDP. Abundant low-cost unds also spilled over into the real estate market, generating

a sharp rise in house prices.Te Peoples Bank o China abandoned its expansionary monetary policy stance

last summer, frst setting stricter guidelines or commercial bank lending, then steppingup its action to sterilize oreign currency reserves, and fnally, at the start o 2010,raising the compulsory reserve ratio several times by a total o 1.5 percentage points to17 per cent or large banks.

Te enlarged public sector defcit came to 3 per cent o GDP in 2009, whereas inprevious years the budget had been broadly in balance. According to the recent budgetplan, which calls or the reallocation o public spending towards greater support orhousehold consumption and incomes, the defcit should hold at around 3 per cent this

year as well.GDP growth accelerated in the frst quarter o 2010 to 11.9 per cent with respect

to the year-earlier quarter, regaining the pace recorded in 2007. Consumption madea large contribution (6.2 percentage points), though still slightly less than investment(6.9 points). Te negative contribution o the external sector moderated to 1.2 points,thanks to the gradual recovery in exports.

India. GDP grew by 6.4 per cent in 2009, 1 point less than in 2008. Teslowdown came in the frst quarter and mainly involved manuacturing and ICservices, the sectors most dependent on oreign demand. Economic activity picked upsharply rom the second quarter on, uelled by the government plan or inrastructureconstruction. Household spending and business investment also returned to growth,

with gains o 3.9 and 5.8 per cent respectively or the year as a whole.

Consumer ination rose rom 8.4 to 10.9 per cent on average or the year, andin January 2010 reached a peak o 16.1 per cent, owing in part to sharply rising oodprices.

From the ourth quarter onwards the Reserve Bank o India altered itsexpansionary monetary policy stance. First, portolio constraints on banks weretightened and then, in the frst ew months o 2010, the reerence rate was raisedrepeatedly by a total o 50 basis points and the reserve ratio by 100 points.

Fiscal policy was directed last year to supporting demand with increased publicworks spending, the reduction o indirect taxes, and other measures on behal o therural poor. Te consolidated public sector defcit thus widened rom 7.9 to 10.5 percent o GDP, and the public debt reached 73.2 per cent o GDP, high by comparison

with the other main emerging countries.

Brazil. Ater fve years o rapid growth, the Brazilian economy registered arecession in 2009, albeit a brie and mild one. GDP slipped by 0.2 per cent. Whileinvestment ell by 10 per cent in response to the drop in international demand and atemporary outow o oreign capital, consumption continued to rise (by 4 per cent),driven by public support measures.


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In the second quarter, with the return o fnancial inows and the rise in theprices o raw materials, o which Brazil is a net exporter, economic activity beganto expand again. However, the rapid reduction o idle capacity uelled inationary

pressures, and in April 2010 consumer price ination stood at 5.3 per cent, wellabove the 4.5 per cent mid-point o the Central Bank o Brazils target range. Aterrapidly lowering the monetary policy reerence rate in the frst hal o 2009 by atotal o 5 percentage points to 8.75 per cent in July (the lowest level since 1996), theCentral Bank then changed its stance. At the start o 2010 it increased the reserveratio and at the end o April the reerence rate as well (by 0.75 percentage points).

Russia. Te Russian economy was hit hard by the global crisis. GDP contractedby 7.9 per cent in 2009, compared with average growth o 7 per cent in the previousfve years. Te collapse o oil export earnings at the depth o the crisis abruptly shrankthe main source o public revenue. Te halt in oreign fnancing to the private bankingsystem was a actor in the rapid contraction o credit and business investment.

Investment ell by 18.2 per cent and private consumer spending by 5.4 per cent,owing to the drastic deterioration in the labour market, with the unemployment raterising rom 6.4 to 8.5 per cent. Inationary pressures eased, the twelve-month increasein the consumer price index alling rom 14 per cent at the start o 2009 to 6.4 per centin March o this year. Te frst signs o a recovery in economic activity came towardsthe end o the year, in response to the frming up o energy prices and the improvementin fnancial conditions.

Te severe liquidity crisis triggered by the sudden outow o capital betweenOctober 2008 and February 2009 led the Central Bank o Russia to inject massivequantities o money into the banking system. With demand still very slack and

inationary pressures sharply reduced, the reerence rate was lowered rom 13 per centin April 2009 to 8 per cent last month. Te drastic decline in tax revenues and thedemand stimulus measures produced a public defcit o 6.2 per cent o GDP ater thesubstantial surpluses o the previous years.


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200914

2. THE FINANCIAL AND FOREIGN EXCHANGE MARKETS

Te negative spiral between the fnancial markets and productive activity thatmarked all o 2008 and the frst ew months o 2009 ended in the spring o lastyear, thanks to strongly expansionary economic policies and measures to support thefnancial system. Financial market conditions eased progressively, anticipating andat the same time ostering the recovery o world economic activity. Te international

banking system also improved in 2009 and the interbank markets began to unctionnormally once again. International portolio investment started to ow back into theemerging economies more rapidly than had been expected, attracted by good growthprospects and wide interest rate spreads compared with the advanced economies.Bank lending to the private sector, which had slowed considerably in all the leadingeconomies except China, gave signs o recovery towards the end o the year. In somemarkets, including China and Brazil, the rapid recovery o the prices o fnancial andreal assets uelled ears o possible speculative bubbles.

For some months, there has been strong pressure on government securities in someEuropean countries, in particular Greece, as a consequence o the marked deteriorationin the public fnances. Tese intensifed between the end o April and the beginning

o May, causing an abrupt increase in risk aversion on international markets. oaddress the crisis in Greece, on 2 May the authorities o the European Union and thegovernments o the euro-area countries agreed a three-year fnancial support plan, withIMF participation, or a total o 110 billion. ensions eased moderately only ater adecision o the European Council, announced on 10 May, to create a mechanism orurther support to EU member countries, i necessary, or a total o up to 500 billion;the IMF would also participate in any such interventions, as in the case o Greece. ooster market stability, on the same day the ECB decided to launch a plan to purchaseeuro-area countries government securities.

Te nancial and foreign exchange markets in the industrial countries

Very great uncertainty and exceptionally volatile conditions still prevailed inthe international fnancial markets in the frst ew months o 2009, ollowing thecrisis o confdence sparked by the collapse o Lehman Brothers and other majorfnancial institutions. Te contribution o public capital and guarantees on assetsand liabilities in the banking system, while stabilizing the balance sheets o the mosthighly exposed banks and averting the paralysis o the fnancial system, had onlypartly tempered ears o urther collapses, which continued to be reected in highpremiums or deault risk on the interbank markets and on credit deault swaps(CDSs) or the major international banks. Share prices continued to all, while risk


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premiums on corporate bonds remained close to the maximum values reached atthe end o 2008; the ight to quality investors desire to hold assets consideredsaer and more liquid kept yields on government securities at very low levels and

acilitated an appreciation o the dollar.Since the spring o 2009, with the gradual strengthening o world economic

activity, conditions on the fnancial markets began to ease, benefting rom the abundantliquidity injected into the system by central banks and rom the measures taken by theauthorities in direct support o the worst-hit markets in the most acute phase o thecrisis.

Compared with the lows o March 2009, in mid-April 2010, the main shareindices had gained almost 80 per cent in the United States and between 60 and70 per cent in the other economies, though they were still signifcantly below thelevels o summer 2007 (Figure 2.1). In particular, the shares o fnancial companies,despite much greater increases, had recouped only hal o the losses accumulated

during the crisis.Figure 2.1

Stock market indices (1)(average weekly data; rst week of January 2007=100)

20092007 2008 201040

60

80

100

120

40

60

80

100

120Euro area: Dow Jones Euro Stoxx

United States: S&P 500

United Kingdom: FTSE All Share

Japan: Nikkei 225

Source: Thomson Reuters Datastream.(1) Up to the week ending on 14 May 2010.

Between March 2009 and mid-April 2010 risk premiums on corporate bonds ellsignifcantly in all risk categories: the yield spreads between the shares o non-fnancialcompanies with a high credit rating (BBB) and 10-year government securities ell rom6.2 to 1.7 percentage points or the dollar and rom 4.7 to 1.5 points or the euro;those or high-yield bonds declined, respectively, rom 18.7 to 5.6 percentage pointsand rom 22.1 to 5.9 points.

Last year, frms made ample recourse to the bond market, issuing securities in theUnited States, in the euro area, and in the United Kingdom or a total equivalent valueo $350 billion, an unprecedented amount that was able to compensate, at least in part,or diculties in accessing bank credit, the supply o which continued to be limited bybanks deleveraging.

Conditions also improved during 2009 or the international banking system: themajor groups profts turned positive, albeit at levels less than hal those in the two-year period prior to the crisis. Between March 2009 and mid-April 2010, the median


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200916

premium on CDSs in relation to the main international banks ell rom 230 to about80 basis points, nevertheless signifcantly greater than beore the crisis.

Te interbank markets returned to normal. Te interest rate spreads betweenunsecured three-month interbank deposits and three-month overnight index swaps a measure o counterparty and liquidity risks gradually narrowed to levels closeto or only slightly greater than those observed in the frst hal o 2007 (less than10 basis points or the dollar and around 20 points or the euro and or sterling).In recent months, easing on the money markets has led the Federal Reserve todiscontinue almost all the liquidity acilities introduced during the crisis. Te onlyone still active, the erm Asset-Backed Securities Loan Facility, is limited to loansguaranteed by newly issued commercial mortgage-backed securities and will expireat the end o June.

Te improvement in fnancial market conditions and the economic recovery

were accompanied, especially in the frst hal o 2009, by a rise in long-term interestrates. Yields on ten-year government securities in the United States and the UnitedKingdom reached their lowest point in late 2008 and early 2009 at 2.1 and 2.9per cent respectively, then rising to 4 per cent by the frst hal o April 2010; theseincreases may have been curbed by government securities purchases by the FederalReserve and the Bank o England as part o unconventional monetary policyoperations. Yields in the euro area, ater rising rom 2.9 to 3.7 per cent in the frsthal o 2009, ell back to just over 3 per cent in mid-April 2010, reecting the

weakness o the recovery in Europe.

At the end o 2009, strong pressures emerged on the government bond marketso some European countries, in particular in Greece, as a result o the emergence

o serious problems in the public fnances and the lowering o the countrys creditrating by the major agencies. Te Greek authorities had aced growing dicultyin refnancing the public debt as it matured; premiums on fve-year CDSs ongovernment securities jumped rom just over 100 basis points last September to morethan 800 points towards the end o April. ensions spread with particular intensityto Portugal: the premiums on CDSs on Portuguese government securities rose rom50 basis points in September to 360 in April. More limited but still signifcantincreases in risk premiums were observed, especially in the second hal o April, inrelation to the debt o other European countries; this indicates the concerns arisingrom the deterioration o the public fnances in the advanced economies and therisk that pressures on one country could spread to others. On 2 May, to address the

crisis in Greece, the EU authorities and euro-area member countries agreed a plano fnancial support under which they would grant bilateral loans or a total o 80billion over three years; the IMF is also participating in the programme, allocating30 billion. With this support, the Greek government has pledged to bring the ratioo the budget defcit to GDP permanently below 3 per cent by 2014, rom its presentlevel o more than 13 per cent.

Despite this agreement, in the ollowing days tensions worsened urther,accompanied by sharp alls in share prices and government bond yields in thecountries considered less risky; rates on ten-year securities in the United States ellto 3.4 per cent, while those in the euro area ell to a low o 2.7 per cent. Teuncertainty was also reected in a sharp increase in premiums on the major banks


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CDSs, which rose to 180 basis points. In order to saeguard fnancial stability inEurope, on 10 May the Finance Ministers o the EU countries decided to createa mechanism under which member countries in severe economic or fnancial

diculties due to exceptional circumstances beyond their control will be eligibleor a loan or a line o credit under terms similar to those applied by the IMF;the resources available or this saety net would, i necessary, reach 500 billion,o which 60 billion disbursed by the EU itsel and 440 billion in the orm oloans granted by a special vehicle and guaranteed by the euro-area governments.Te IMF has declared its readiness to participate in any interventions by providingextra unding in proportion to the amount given by Europe, as in the plan orGreece. Furthermore, to re-establish the orderly working o the worst-hit markets,the ECB announced a series o extraordinary measures, including a plan to purchasegovernment securities and corporate bonds o countries in the euro area. Followingthese decisions, in mid-May the tensions were attenuated, although there were stillhigh levels o uncertainty and volatility in the markets.

In early 2009, on the oreign exchange markets the strong demand on the parto fnancial agents or liquidity in dollars and the ight to quality continued toacilitate the appreciation o the dollar against the euro and sterling. Since then, theoreign exchange markets have undergone two distinct phases (Figure 2.2): betweenMarch and November 2009 the dollar ell by 14 per cent against the yen and about17 per cent against the euro and sterling, reecting expectations o an expansionaryUS monetary policy stance or an extended period and no structural reduction inglobal payments imbalances. Later, although the dollar ell by 4 per cent against theyen, it began to appreciate against the other two currencies: between early Decemberand 20 May, it regained 23 per cent against the euro and 15 per cent against sterling.

Tis strengthening seems connected with the improvement in the economic pictureand the prospect or an earlier tightening o monetary policy in the United States; inmore recent weeks, however, the climate o great uncertainty unleashed by the crisisin Greece has been the main contributor to the weakness o the euro.

Figure 2.2

Exchange rates o the main currencies(average monthly data)

20082007 20102009

70

80

90

100

110

120

130

140

70

80

90

100

110

120

130

140

dollar sterling yen euro

Nominal effectiveexchange rates (4)

200920082007 2010

85

100

115

130

145

160

175

190

0.65

0.80

0.95

1.10

1.25

1.40

1.55

1.70

yen/euro (2) yen/dol lar (2)

sterling/euro (3) dollar/euro (3)

Nominal bilateral exchange rates (1)

Sources: Bank of Italy and ECB.(1) Units of the rst currency per unit of the second; the data for May 2010 are based only on the rst 20 days of the month. (2) Right-handscale. (3) Left-hand scale. (4) Indices, January 2007=100.


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200918

Te nancial and foreign exchange markets in the emerging countries and new EUmember countries not part of the euro area

Since spring 2009, the abatement o risk aversion worldwide and the low levelo interest rates in the advanced economies have encouraged a rapid recovery ointernational ows o capital to the emerging countries. Stock market indices turnedupwards again, spreads on the yields o sovereign debts were reduced and the currencieso the countries with more exible exchange regimes strengthened.

In the frst ew months o 2010 the fnancial conditions o the emerging countriescontinued to improve. Te sharp increase in tensions on the international capitalmarkets in late April and early May unleashed by the serious situation o the publicfnances in Greece led to general deterioration. Against a background o heighteningvolatility, the share indices recorded losses: at 20 May, or the emerging countries as a

whole, the level was 8 per cent lower than at end-2009. From the minimum reached at

the end o March, spreads on the yields o sovereign debt rose to an average o 330 basispoints by 20 May, higher than at the end o 2009. Te major currencies have weakenedagainst the dollar.

Te resumption o private capital ows to the emerging countries in 2009 mainlyinvolved share and bond portolio investment; net ows o bank credit remained weak,continuing to record disinvestment rom central and eastern European markets androm Russia. In some emerging economies, the rapid increase in fnancial asset pricesdrove the authorities to adopt, or to announce the possibility o adopting, extraordinarymeasures to control capital movements.

Te contraction o fnancial leverage by the international banking system, together

with lower demand or credit on the part o the domestic private sector, contributed toa signifcant slowdown o internal credit during 2009 in the main emerging areas. Teonly important exception is China, where the strong acceleration in lending reectedthe need to und a substantial public investment programme. But at the end o 2009the trend in lending did show signs o recovery in Asia and o stabilization in Latin

America and central and eastern Europe.

In the new EU member countries not belonging to the euro area there was aneasing o fnancial tensions, which had been most acute in the frst ew months o2009; the currencies o Poland, the Czech Republic and Hungary began to appreciateagain, although they did not reach their pre-crisis levels. In some o the more vulnerableeconomies episodes o fnancial tension continued until the summer.

At the end o 2009, premiums on these emerging economies CDSs had allento values between 230 and 550 basis points. Only in Estonia had premiums allenbelow 200 basis points, a value in line with those o September 2008, mainly due tothe eective consolidation o the public defcit on the part o the authorities and theconsequent improvement in prospects or adopting the euro as o 2011.


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3. WORLD TRADE AND PAYMENTS BALANCES

Last year, world trade in goods and services shrank by 10.7 per cent, the mostsevere contraction since the Second World War. From the spring onwards there weresigns o a gradual recovery.

Te main raw materials prices reected trends in the economic cycle. Ater allingsharply in the second hal o 2008, in early 2009 prices began to recover rapidly, drivenby strengthening demand rom emerging Asian economies, in particular China.

Current account imbalances narrowed in all the main areas, primarily or cyclicalreasons, such as the weakness o demand and the prices o raw materials and energy.

World trade

In 2009 the contraction in trade aected both goods (down 11.8 per cent in volumeterms and nearly 23 per cent in value terms), and services (down 12 per cent in value

terms). Concentrated between the end o 2008 and early 2009, the decline in the volumeo trade occurred simultaneously in all the main economies (Figure 3.1).

Figure 3.1

World trade in goods: main geographical areas (1) (2)(percentage changes; volume)

2009200820092008-40

-30

-20

-10

0

10

20

30

-40

-30

-20

-10

0

10

20

30

EU North America Asia (advanced economies) Asia (emerging economies)

Sources: Based on national statistics and Eurostat data.(1) Growth rates are calculated on the corresponding period of the previous year. (2) North America: Canada and the United States;European Union countries; Asia (advanced economies): Japan, South Korea, Singapore and Taiwan; Asia (emerging economies): China,Indonesia and Thailand.

Between the peak in the second quarter o 2008 and the low in the frst quartero 2009, the global volume o merchandise exports ell by almost 20 per cent. Tose


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200920

o the advanced Asian economies declined most markedly (by around 30 per cent), inpart owing to these countries specialization in durable goods sectors, which tend to bemore exposed to cyclical uctuations.

Te subsequent recovery in world trade was driven above all by that o importsin the emerging Asian economies, especially China. In the ourth quarter o 2009, thevolume o merchandise imports in the main advanced areas was signifcantly down onthe peaks recorded in 2008 (by around 16 per cent in Europe, 14 per cent in North

America and 10 per cent in Asia), while in the emerging Asian economies they had morethan recouped the previous losses and were estimated to be up by about 10 per cent. Terecovery, which began in the second hal o 2009, continued into early 2010, albeitat a slower pace; current world trade levels remain about 7 per cent below the peakrecorded in the frst quarter o 2008.

Te severity o the world recession had raised ears o an intensifcationo protectionist pressures. According to the latest estimates o the World rade

Organization, relatively ew deensive trade protection measures were adopted in 2009and they became less and less requent as the year came to a close.

Te Doha Round multilateral negotiations on trade liberalization ailed to makeany signifcant progress. As a result, its hoped-or conclusion by the end o 2010 nowappears very unlikely. Te stalling o the multilateral talks strengthened incentivesto draw up ree trade agreements at regional level. Tis trend intensifed sharply in

Asia, where there is a need to promote the urther development o the internationalproduction chains that are typical o the regions manuacturing industry.

Commodity prices

In 2009 oil and non-uel commodity prices quoted in dollars ell by 34.8 and 16.7per cent respectively, compared with a drop o 6.9 per cent or manuactured goods.Starting in early 2009, with the recovery o economic activity in the emerging Asianeconomies, prices began to rise rapidly, despite remaining generally lower than thehighs recorded in the early part o 2008.

In line with previous episodes o synchronized global economic developments,the highest volatility was recorded in the prices o oil and the main metals. In 2009demand or oil shrank by 1.4 per cent, the sharpest contraction since the beginningo the 1980s. Te downturn occurred in the frst hal o the year; consumption then

expanded rapidly, boosted by strong growth in the emerging countries. In China crudeoil consumption rose by almost 8 per cent, accounting or about two thirds o theoverall increase in the non-OECD countries. At the end o 2009 global demand or oilhad returned to levels close to those recorded beore the crisis.

Since October the price o oil (average or the three main grades) mostly stayedwithin a range o $70 to $80 a barrel, except or temporary increases o up to $85 abarrel in April. Price volatility was generally limited, however, and the markets expectonly gradual increases in the quarters to come (WI utures prices indicate an increaseo up to $84.8 a barrel over the next twelve months). Te ample spare capacity inOPEC countries, around 6 million barrels a day or 7.4 per cent o orecast globaldemand or 2010, should help to curb upward pressure on prices.


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Balance-of-payments disequilibria

In 2009 the US current account defcit ell sharply, rom 4.9 per cent o GDP in2008 to 2.9 per cent (able 3.1). Te absolute value, $420 billion, is about hal thepeak registered in 2006. Tis improvement is wholly attributable to the narrowing othe trade defcit, which ell by 40 per cent compared with 2008, rom $840 billion to$517 billion, above all ollowing the sharp decline in expenditure on net imports oenergy products and, to a lesser degree, the drop in the volume o imported goods.However, the trade defcit had already ceased to narrow in the second hal o 2009, andin the frst quarter o 2010 it was over 20 per cent wider with respect to the previousyear, mainly as a result o the rise in oil prices.

In 2009, non-resident capital inows to the United States were meagre by historicalstandards, totalling $435 billion, even less than the already modest $534 billion o

the previous year. While the inows attributable to oreign authorities held up ($448billion), owing to the continued build-up o international dollar reserves, privatecapital ows recorded a net outow or the frst time in the last orty years. urning tothe breakdown o the ows, the Other investmentcategory, primarily o banking origin,recorded a net outow o $209 billion. Foreign direct investment halved, alling to$152 billion, the lowest level since 2005; by contrast, portolio investment returned togrowth and rose to $492 billion, reecting the recovery o the fnancial markets in thesecond hal o the year.

Te ratio o the US net debtor position to GDP is not expected to have increasedsignifcantly rom the 27.7 per cent registered at the end o 2008. Te eects o changesin the dollar values o oreign fnancial assets and liabilities, which in 2008 had made

a signifcant contribution to the deterioration o no less than 17 percentage points inthe net debtor position, appear to have turned positive (thanks to the depreciation othe dollar and the recovery o international stock markets), osetting at least part o thedeterioration caused by the defcit on current account.

Ater peaking in 2008, the current account surplus o the main oil-exportingcountries narrowed by almost 70 per cent in 2009, to $197 billion, primarily as a resulto lower crude oil prices. Te surplus recorded an especially marked all in the OPECcountries, rom 19.3 to 5.1 per cent o GDP, but contracted less in Russia (rom 6.2to 4 per cent).

Te overall surplus o the main Asian economies (excluding India) narrowed to

$648 billion, rom $712 billion in 2008. Perormances were rather uneven, however:while the surplus o the newly-industrialized countries and the ASEAN-4 increasedsharply, Japans narrowed slightly and Chinas ell by almost one third, to $297 billionor 6.1 per cent o GDP. Te result in China was inuenced by the sharp decline inexports compared with the more modest one in imports, sustained by fscal stimulusmeasures; in the frst three months o 2010 the reduction in the trade surplus did notappear to have come to a halt.

Following the slowdown in 2008, the build-up o oreign exchange reserves byemerging economies gathered pace again; at the end o February stocks had reachedover $5.5 trillion, a 9 per cent increase on the peak recorded in August 2008. Since theend o 1995, beore the Asian crisis struck, the stock o emerging countries reserves


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200922

Table 3.1

Current account o the balance o payments and oreign exchange reserve fows

Current account balance (1) Reserves

2007 2008 2009 2007 2008 2009 (2)

billiondollars

%of GDP

billiondollars

%of GDP

billiondollars

%of GDP

billiondollars

billiondollars

billiondollars

United States -726.6 -5.2 -706.1 -4.9 -419.9 -2.9 4.7 7.1 53.1

Euro area 18.8 0.1 -226.6 -1.7 -73.6 -0.6 18.2 3.3 64.8

Japan 211.0 4.8 157.1 3.2 141.7 2.8 73.1 56.6 12.9

United Kingdom -75.1 -2.7 -39.8 -1.5 -28.7 -1.3 8.3 -4.6 11.4

Canada 14.6 1.0 9.2 0.5 -36.4 -2.7 6.0 2.8 10.5

Latin America 14.8 0.4 -26.7 -0.6 -18.6 -0.5 134.9 52.6 51.1

Asia 537.7 7.4 523.6 6.1 474.7 5.3 694.5 412.0 733.7

Newly-industrializedAsian economies 111.5 6.1 84.6 4.9 137.7 8.6 73.6 1.5 212.2

Hong Kong 25.5 12.3 29.3 13.6 18.4 8.7 19.5 29.8 73.3

Singapore 47.1 27.5 35.9 19.1 34.1 19.2 26.7 11.2 13.6

South Korea 5.9 0.6 -5.8 -0.6 42.7 5.1 23.3 -61.0 68.8

Taiwan 33.0 8.4 25.1 6.2 42.6 11.2 4.2 21.4 56.5

ASEAN-4 62.5 6.2 44.0 3.8 71.5 6.2 62.9 11.2 50.7Indonesia 10.5 2.4 0.1 .. 10.6 2.0 13.9 -5.4 14.0

Malaysia 29.2 15.7 38.6 17.4 32.1 16.8 18.9 -9.9 4.3

Philippines 7.1 4.9 3.6 2.2 8.6 5.3 10.2 3.0 5.6

Thailand 15.7 6.3 1.6 0.6 20.3 7.7 19.9 23.4 26.8

India -8.1 -0.7 -31.1 -2.6 -31.6 -2.6 96.3 -19.6 17.8

China 371.8 11.0 426.1 9.4 297.1 6.1 461.8 419.0 453.1

Central andEastern Europe -132.6 -8.0 -152.1 -7.8 -37.9 -2.3 60.6 -0.5 44.9

Main oil-exporting countries 464.9 10.4 608.0 11.1 197.1 4.4 383.6 99.3 -17.4

OPEC (3) 340.9 19.3 436.4 19.3 100.4 5.1 197.5 156.2 -24.7Algeria 30.6 22.8 34.5 20.2 0.5 0.3 32.4 32.9 5.8

Angola 9.4 15.9 6.4 7.5 -2.2 -3.3 2.6 6.7 -4.2

Ecuador 1.7 3.6 1.2 2.2 -0.6 -1.1 1.3 0.9 -0.9

Iran 34.1 11.9 24.0 7.2 7.9 2.4 . . .

Kuwait 50.0 44.7 64.5 40.8 28.7 25.8 4.1 0.5 3.2

Libya 29.1 40.7 36.6 40.7 10.2 16.9 20.1 12.9 6.7

Nigeria 31.2 18.8 42.3 20.4 20.1 11.6 9.0 1.7 -13.1

Qatar 21.8 30.7 33.1 33.0 13.8 16.4 4.0 0.2 8.7

Saudi Arabia 93.5 24.3 132.5 27.9 20.5 5.5 79.5 137.0 -32.6

United ArabEmirates 19.5 9.4 22.2 8.5 -7.0 -3.1 49.6 -45.5 5.7

Venezuela 20.0 8.8 39.2 12.3 8.6 2.5 -5.2 8.9 -11.4

Mexico -8.4 -0.8 -15.9 -1.5 -5.2 -0.6 10.8 8.0 4.5

Norway 54.7 14.1 83.8 18.6 52.9 13.8 4.0 -9.9 -2.1

Russia 77.8 6.0 103.7 6.2 49.0 4.0 171.2 -55.0 4.9

Sources: IMF and national statistics.(1) Due to errors, omissions and differences in international statistics, the world current account balance, instead of being nil, is nowpositive (according to IMF estimates, by $310.3 billion in 2007, $180.4 billion in 2008 and $174.4 billion in 2009). (2) For the UnitedArab Emirates, rst eleven months; for Nigeria, rst ten months. (3) The OPEC aggregate does not include Iraq; the ow of foreignexchange reserves does not include Iran.


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200924

4. THE G20 AND INTERNATIONAL ECONOMICCOOPERATION

Te G20 countries have continued to give powerul impetus to the reorm o theinternational fnancial system. At the summits in London and Pittsburgh (April andSeptember 2009) it was decided to signifcantly increase the resources o the internationalfnancial institutions, revise their lending instruments, improve cooperation in thefeld o economic policy, and strengthen the international fnancial system. Temain initiatives approved concern: a) a multilateral exercise or the coordination omember countries economic policies, with the aim o creating a ramework or strong,sustainable and balanced growth; b) the defnition o regulatory policies or fnancethat will prevent a repetition o the excesses that led to the crisis; and c) reorm o thegovernance o the international fnancial institutions.

Increase in the international nancial institutions resources and reform of theirlending instruments

Increase in the IMFs resources. At the London summit the G20 countriesundertook to triple the resources o the IMF to $750 billion, rom $250 billion beorethe crisis, by expanding the New Arrangements to Borrow (NAB). Te announcemento this decision contributed to the reduction in the spreads on emerging countriessovereign debt, which had started in the early months o 2009 ater they had peaked inthe most acute phase o the crisis.

Te reorm o the NAB was approved by the IMFs Executive Board in April2010: the number o participant countries rose rom 26 to 39, the resources availablerose rom $52 billion to $588 billion ($88 billion more than the original objective),

and more exible procedures were introduced or the IMF to use these resources.In the meantime some members o the G20 and some other European countries

have provided the IMF with new resources on a bilateral and temporary basis throughbilateral loan agreements or purchases o IMF credit notes or a total o about $250billion. Tese resources will be incorporated into the NAB at a later stage.

At the behest o the G20 the IMF approved a new general allocation o SDRsamounting to $250 billion, o which $100 billion in avour o emerging and developingcountries. At the same time the Fourth Amendment o the Articles o Agreement wasapproved, with provision or a one-time allocation o SDRs amounting to $33 billion.

With these decisions the stock o SDRs was increased rom 21 billion to 204 billion.


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IMF lending. Te recession led numerous countries to turn to the IMF orfnancial assistance. Between the second hal o 2008 and April o this year the IMFapproved 24 new credit lines or a total o SDR 105 billion ($160 billion).

Overhaul o the Funds lending instruments. Te IMF has undertaken a ar-reachingoverhaul o its fnancial assistance instruments. Te main reorms concerned: a) thecreation o a new window known as the Flexible Credit Line (FCL); b) the granting olarge loans through ordinary credit instruments (Stand-By Arrangements; SBA); and c)the resources devoted to concessional credit and the related lending acilities.

Unlike the Stand-By Arrangements, the Flexible Credit Line is based on the priorsatisaction o some conditions and does not require the achievement o objectivesagreed with the borrower country. Tis instrument, which can be renewed andis without predetermined limits, is reserved to member countries with very strongundamentals, policies, and track record o policy implementation; the credit line can

be o a purely precautionary nature and can last or six or twelve months.

As regards the IMFs ordinary credit acilities, the reorm has doubled the normallending limits, taking the annual limit to 200 per cent o a countrys quota andthat on a cumulative basis to 600 per cent. In addition, the procedure or grantingprecautionary credit above the normal limits under the SBA (High-Access Precautionary

Arrangements, HAPAs) has been set out more clearly and simplifed. HAPAs have thesame fnancial conditions as the SBA, can be requested in the absence o actual balance-o-payments need and resources can be rontloaded.

In January a thorough revision o the IMFs concessional lending acilities or low-income countries was completed; it was also decided to increase the resources available

and to make additional acilitations o a temporary nature available to borrowercountries.

Te reorm provides or the resources to be channelled into a single und, thePoverty Reduction and Growth rust (PRG). In addition, three new credit acilitieshave been established, with dierent loan maturities and conditionality: the ExtendedCredit Facility (ECF), reserved to countries with protracted balance-o-payments needs;the Stand-By Credit Facility (SCF), which provides short-term fnancial assistance orepisodic balance-o-payments needs and those o a potential nature (in which case theinstrument can be used on a precautionary basis); and the Rapid Credit Facility (RCF),

which guarantees a small volume o resources with limited conditionality when thereis an urgent need to raise unds.

Lastly, measures were approved to reduce the debt servicing costs incurred bycountries that use the Poverty Reduction and Growth rust.

Increase in the resources o the Multilateral Development Banks. Te globaleconomic crisis will have a lasting eect on the achievement o the MillenniumDevelopment Goals or 2015.

Te loans granted by the Multilateral Development Banks (MDBs) wereincreased considerably to mitigate the adverse eects o the crisis on the poorest stratao the population. In 2009 alone the three largest MDBs (the World Bank, the Inter-

American Development Bank and the Asian Development Bank) approved new loans


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200926

amounting to $62 billion, about twice the average or the two years 2007-08 ($33.5billion); more than two thirds o the additional $28 billion came rom the World Bank.

A large proportion o the new loans served to provide direct support to the benefciary

countries public fnances, thus allowing measures to assist the part o the populationhardest hit by the crisis to be fnanced and permitting aster disbursement o unds.

In response to the increase in lending, all the major MDBs took action to boosttheir resources. Capital increases were approved by the Asian Development Bank in

April 2009, the Inter-American Development Bank in March 2010, the World Bank(IBRD) in April 2010, the Arican Development Bank in May 2010, and the EuropeanBank or Reconstruction and Development in May 2010.

Tese capital increases added more than $340 billion to the resources available tothe major MDBs; the amount that member countries will actually be required to payin during the coming years is equal to about $15 billion (able 4.1).

Table 4.1

Capital increases by Multilateral Development Banks(in billions of dollars, except as indicated)

IBRD AsianDB

IADB AfricanDB

EBRD(1)

Subscribed capital before the increase 190 55 101 36 20

Subscribed capital after the increase 276.2 165 171 98 30

Change 86.2 110 70 62 10 (2)

of which: instalments to be paid 5.1 4.4 1.7 3.7 1 (2)

(1) In billions of euros. (2) The agreement provides for the cancellation of the uncalled part, equal to 9 billion, if it is not used by 2015.All the paid-in part will be transferred from the Banks reserves.

Strengthening of international cooperation and reform of the nancial system

Coordination o economic policies. At the Pittsburgh summit in September 2009the G20 countries decided to undertake a multilateral exercise or the coordination otheir economic policies, with the aim o creating a ramework or strong, sustainableand balanced growth. In this context the G20 fnance ministers were charged with:a) agreeing on shared economic policy objectives; b) setting out a medium-term policyramework and working together to assess the collective implications o national policy

rameworks or the level and pattern o global growth and identiy potential risksto fnancial stability; and c) considering corrective actions. Te technical activity ocarrying out analyses and putting orward proposals has been entrusted to the IMF orthe examination o mutual consistency o economic policies and to the World Bank orthe assessment o the impact on development and poverty reduction.

Using the inormation provided by the G20 countries, the IMF has drawn up abaseline scenario or their growth in the period 2010-14. Te next step involves thedrawing up o alternative scenarios on the basis o a series o principles agreed by thefnance ministers and central bank governors. Te results o these exercises will provideindications or the orientation o economic policies to be submitted to the heads ostate and government or them to take the appropriate decisions.


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MACROECONOMIC DEVELOPMENTS,

BUDGETARY POLICIES AND MONETARY

POLICY IN THE EURO AREA


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5. MACROECONOMIC DEVELOPMENTS

In 2009 the GDP o the euro area suered its most severe contraction since theSecond World War. Ater the sharp drop in output recorded in the frst hal o the year,all the major countries showed a modest recovery in the second, except or Spain, hitby the sharp downturn in the construction sector.

In the area as a whole, the pickup in growth drew most o its strength rom theincrease in exports, which were boosted by the recovery in international trade, andthe turn in the inventory cycle. Te decline in domestic demand came to a halt, aidedby the incentives adopted by governments. Te pace o euro-area growth remainedbelow that recorded in the United States, Japan and the main emerging economies.

Te recovery continued into the frst quarter o 2010 and, based on the latest data,in recent months. In the spring, the -coin indicator computed by the Bank o Italy,

which measures euro-area growth adjusted or short-term uctuations, settled at levelscompatible with a urther recovery in economic activity.

Uncertainty dogs the strength o the recovery. Te rise in production risks beingheld back by the gradual phasing out o the expansionary economic policies, the end othe inventory replenishment cycle, and the deterioration in labour market conditions,

which could aect consumption.Growth prospects or the euro area could also be dampened by the fnancial strainsconnected with the Greek crisis and by the need to correct the external imbalances thathave built up in several countries in the last ten years, despite the broadly balancedposition o the area as a whole. Te indispensable adjustment o European economies

with large external defcits should be accompanied by structural measures to stimulatedomestic demand in countries running a surplus. Within this group, the removal oobstacles to domestic investment, through measures designed to heighten competitionin service sectors that are not exposed to international competition, would supportproductive activity and employment, thereby boosting household expenditure andpurchases o goods rom countries with a defcit.

Te risk o deation did not materialize in 2009. Last years slowdown in thegrowth o consumer prices, to 0.3 per cent on average rom 3.3 per cent in 2008,was mostly the result o the steep drop in the prices o imported raw materials. Coreination, though slowing slightly, amounted to just under 1.5 per cent. For 2010 and2011 analysts predict broadly similar average rates.

Te euro area

In 2009 euro-area GDP shrank by 4.1 per cent in real terms, owing to thecontraction recorded in the frst hal o the year (able 5.1). In the second hal output


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200932

began to grow again, albeit at a slow pace (gaining 0.4 per cent on the previous period),and unevenly across sectors. Te improved perormance o industry, where the rise invalue added oset only a small part o the contraction suered during the recession,

contrasted with stagnation in services and a urther decline in construction.Table 5.1

GDP, imports and the main components o demandin the major euro-area countries (1)

(chain-linked volumes; percentage changes on previous period)

2007 2008 2009 2009

Year Year Year Q1 Q2 Q3 Q4

GDP

Germany 2.5 1.3 -4.9 -3.5 0.4 0.7 0.2France 2.4 0.2 -2.6 -1.4 0.2 0.3 0.5Italy (2) 1.5 -1.3 -5.0 -2.9 -0.3 0.4 -0.1

Spain 3.6 0.9 . -1.7 -1.0 -0.3 -0.1Euro area (2) (3) 2.8 0.6 -4.1 -2.5 -0.1 0.4 ..

Imports

Germany 4.8 4.3 -9.5 -6.1 -4.8 4.7 -1.6France 5.6 0.6 -10.7 -6.0 -3.0 0.2 2.6Italy 3.8 -4.3 -14.5 -9.7 -2.5 1.6 3.2Spain 8.0 -4.9 . -10.8 -2.3 1.7 2.1Euro area (3) 5.5 1.1 -11.5 -7.6 -2.8 2.9 1.3

Exports

Germany 7.5 2.9 -14.5 -10.2 -1.0 3.2 2.3France 2.5 -0.5 -12.4 -7.7 0.2 1.7 0.4Italy 4.6 -3.9 -19.1 -11.3 -2.8 2.6 0.1Spain 6.6 -1.0 . -8.4 0.7 2.1 3.0Euro area (3) 6.3 1.0 -12.9 -8.0 -1.1 2.9 1.9

Household consumption (4)

Germany -0.3 0.4 -0.1 0.4 0.8 -1.3 -0.2France 2.6 0.5 0.6 .. 0.3 0.3 0.9Italy 1.1 -0.8 -1.7 -1.3 0.3 0.6 -0.1Spain 3.6 -0.6 . -2.4 -1.3 .. 0.3Euro area (3) 1.6 0.4 -1.1 -0.5 0.1 -0.1 ..

Gross xed investment

Germany 5.0 3.1 -9.0 -7.8 0.7 0.8 -1.0France 6.0 0.5 -7.1 -2.6 -1.3 -1.4 -1.1Italy 1.7 -4.0 -12.1 -3.9 -2.7 .. -1.0Spain 4.6 -4.4 . -6.0 -4.1 -2.4 -1.0Euro area (3) 4.8 -0.6 -10.8 -5.2 -1.6 -0.9 -1.3

National demand (5)

Germany 1.1 1.8 -2.2 -1.6 -1.1 1.3 -1.5France 3.3 0.5 -2.4 -1.2 -0.5 -0.1 1.4Italy 1.3 -1.5 -3.8 -2.4 -0.5 0.3 0.5Spain 4.2 -0.5 . -2.7 -1.7 -0.3 -0.3Euro area (3) 2.4 0.6 -3.4 -2.3 -0.8 0.4 -0.2

Sources: Based on national statistics and Eurostat data.(1) The quarterly data are adjusted for seasonal and calendar effects. (2) The quarterly data include information made available afterthe publication of the full set of national accounts. (3) The aggregate for the euro area relates to 16 countries. (4) Consumption ofresident households and non-prot institutions serving households. (5) Includes changes in stocks and valuables.

Spurred by the revival in international trade, euro-area exports o goods andservices began to expand again in the summer, gaining 3.3 per cent in volume termsin the second quarter compared with the frst and interrupting the downward trend


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under way since the spring o 2008. For the year as a whole the decline was 12.9 percent. Among the main economies, Germanys exports increased markedly, by 3.8 percent in the second hal o 2009 compared with the frst, helped by the greater presence

o German businesses in more dynamic markets (such as China and the other emergingAsian economies) and in the sectors where worldwide trade had recovered most. InFrance and Italy the increase between the frst hal and the second was more modest(2 per cent and 1.2 per cent, respectively). One contributory actor was the loss oprice competitiveness in the last decade. In the second hal o 2009, the strengtheningo demand also helped to sustain euro-area imports o goods and services, whichnonetheless expanded at a slower pace than exports.

With production levels still very low, there was a decline in capital goodsinvestment, which became progressively less steep during the year. Only in Germanyand Italy did signs o an increase in purchases o machinery, equipment and means otransport appear in the second hal o the year. Expenditure o this kind was held back

by the low rates o plant capacity utilization, the uncertainty o the expectations aboutthe strength o the recovery and the strains in the credit market.

Te cyclical downturn in the construction sector continued. Last year investmentell by an average o 7.3 per cent in real terms, mostly reecting the contraction o 9.5per cent in the residential component. Te slowdown in housing construction wasexceptionally severe in Spain (24.5 per cent), where this sector had been a mainstay oGDP growth in the last decade.

Te all in household consumption o 1.1 per cent in real terms contributed toweak demand within the euro area and curbed the already slow growth recorded sincethe turn o the century. Te all derived both rom the stagnation o real disposable

income, notwithstanding moderate ination, and rom the increase in the propensityto save (rom 13.9 per cent in 2008 to 15.4 per cent, gross o variations in pensionund reserves) in response to concern about labour market prospects. Among the maincountries, the propensity to save grew most markedly in Spain (rom 12.9 to 18.8 percent) and remained high in Germany (17.2 per cent), where the increase in the lastdecade reected the uncertainty that had arisen in connection with the reorm o thesocial security system. In France too, despite the avourable perormance o disposableincome, households spending decisions were marked by caution, with an increase inthe saving rate o almost one percentage point, to 16.1 per cent.

Te indications o a brighter economic outlook recorded in the second hal o

2009 continued into the early months o 2010. Te rise in the purchasing managersindex, the improvement in the climate o business and, despite some uncertainty,household confdence pointed to the gradual spread o more optimistic views on thecurrent cyclical phase. In May, however, qualitative surveys reected concern over theeects o the recent fnancial tensions stemming rom the Greek crisis.

Te quantitative indicators have yet to show an equally robust improvement. Tepace o the recovery in industrial production is slow compared with the sharpness othe earlier decline (Figure 5.1): in the frst quarter o 2010, manuacturing volumes

were around 15 percentage points below the peak registered in early 2008 in Germany,France and the euro area as a whole and about 20 percentage points lower in Italy. InSpain, production continued to stagnate.


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200934

According to preliminary data, in the frst quarter o 2010 GDP grew by 0.2 percent on the previous period in the euro area as a whole and in Germany. Te pace wasaster in Italy (0.5 per cent) and barely positive in France and Spain.

Figure 5.1

Industrial production in the major euro-area countries (1)(moving averages for the three months ending in the reference month)

20092001 2002 2003 2004 2005 2006 2007 2008 201080

85

90

95

100

105

110

115

120

80

85

90

95

100

105

110

115

120

Italy Germany France

Spain Euro area (2)

Sources: Based on Istat and Eurostat data.(1) Indices, 2005=100; seasonally adjusted data. (2) The aggregate for the euro area relates to 16 countries.

Te latest economic data suggest the recovery will continue. Ater accuratelysignalling the turning point o the economic cycle early in 2009, the -coin indicatorincreased sharply; in the frst part o 2010, despite alling slightly, it remained at arelatively high level (Figure 5.2).

Figure 5.2Coincident cyclical indicator (-coin) and euro-area GDP

(three-month percentage changes)

20102002 2003 2004 2005 2006 2007 2008 2009-2.6

-2.0

-1.4

-0.8

-0.2

0.4

1.0

1.6

-2.6

-2.0

-1.4

-0.8

-0.2

0.4

1.0

1.6

-coin GDP (1)

Sources: Bank of Italy and Eurostat. For more details on the -coin indicator: see http://eurocoin.bancaditalia.it.(1) The aggregate for the euro area relates to 16 countries.

Prices and costs

Consumer prices. Ater reaching the highest level since the launch o the thirdphase o monetary union (3.3 per cent), annual consumer price ination in the euro


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200936

Figure 5.3

Contributions to infation in the euro area(percentage points)

2002 2003 2004 2005 2006 2007 2008 2009 2010

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

energy products non-food and non-energy products

unprocessed food processed food

services total (1)

Source: Based on Eurostat data.(1) Twelve-month percentage change in the harmonized index of consumer prices.

Producer prices, costs and proft margins. Ater rising by 6.1 per cent in 2008,last year the producer prices o products sold in the domestic market declined by5.1 per cent. Te all reected those recorded by the energy, intermediate goods andood components (11.5, 5.3 and 4.5 per cent respectively), which were more directlyaected by the sharp contraction in raw material prices. By contrast, the prices o non-

ood fnal consumption goods remained unchanged rom the previous year, comparedwith an increase o 0.9 per cent in 2008.

Te decline in producer prices slowed between late 2009 and early 2010 inresponse to the growing pressures linked to increases in input costs. In March, orthe frst time in over a year, the twelve-month increase turned positive and rose to0.9 per cent.

Following the depreciation o the euro, the producer prices o non-energyindustrial goods sold outside the euro area ell less than those or such goods sold onthe domestic market (by 1 and 2.8 per cent, respectively). Early in 2010, the all inexport prices came to a halt, as the international economic outlook brightened.

Last year unit labour costs in the economy as a whole grew at a rate close to 4 percent, compared with 3.1 per cent in 2008 (able 5.3). Te rise reected the cyclicaldecline o 1.2 per cent in hourly output, which was especially pronounced in industry(6.3 per cent), where the all in value added was associated with measures to supportemployment based on reducing the number o hours worked, above all in Italy andGermany.

According to national accounts data, the share o profts in value added in theeuro area as a whole declined by about 6 percentage points with respect to 2008; thecontraction was smaller in the service sector, where the eects o the all in worlddemand were less pronounced.


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200938

Employment

According to national accounts data, in 2009 euro-area employment ell by 1.9

per cent (over two million less people in employment), with a marked decline in theearly part o the year.

Among those in the 15-64 age group the employment rate ell by around onepercentage point compared with 2008, to 64.8 per cent; there was a sharp reduction ormen, rom 73.4 to 71.2 per cent, especially those aged between 15 and 39, rom 70.6 to67.2 per cent; the emale participation rate remained largely unchanged at 58.4 per cent.

In 2009 the unemployment rate continued to rise, to an average o 9.4 per centor the year (up 1.8 percentage points on 2008); in March o this year it stood at 10 percent, the highest level since 1998.

Te impact o the global crisis on the labour market was elt worldwide but its

eect on the number o those in employment and on hours worked was distributedunevenly. In Germany, widespread recourse to measures to support employment helpedcurb job losses; the slump in economic activity was reected above all in a reduction inhours worked. Te unemployment rate increased only slightly, averaging 7.5 per centor the year; unlike in the other major countries, the employment rate showed a smallyear-on-year increase, rom 70.3 per cent to 70.8 per cent.

In Spain, total employmen

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BI Annual Report en 009