Overall, the global economy showed continued strong growth over the last fiscal year. Following the successful performance in 2005, it is expected that 2006 will generate further growth. The International Monetary Fund (IMF) has increased its forecast for world economic growth in 2006 to 5.1% from 4.8%. In spite of this positive outlook, the IMF has nevertheless drawn attention to the increased risks caused by global imbalances. Above all, economic growth could be dampened by spiraling oil and raw materials prices and higher inflation, especially in the U.S.

Overall economic performance in the Eurozone was also positive. In its interim report, the Organization for Economic Cooperation and Development (OECD) raised its forecast for growth in 2006 to 2.7% from 2.2%. The Eurozone has benefited from an increase in domestic demand and a reduction in unemployment in the major economies France and Germany. For the first time since 2001, the unemployment rate in the twelve member states of the currency union fell to below 8%, while in the second quarter of 2006 and for the first time in years the Eurozone economy reported higher growth than the United States.

Germany was one of the main drivers of economic growth in Europe. The German economy grew faster than at any time over the last five years. Real Gross Domestic Product (GDP) in the second quarter of 2006 was 1.0% higher than for the same period in 2005, according to the Federal Statistics Office. The Kiel Institute for the World Economy has increased its forecast for GDP to 2.4% from 2.1%, while the OECD now expects growth of 2.2% up from 1.8%.

2006 has seen a significant slowdown in the U.S. economy. GDP growth fell off in the second quarter to 2.6%, whereas in the first quarter the economy had grown at the equivalent of 5.6% per year, according to the U.S. Trade Department. Inflationary pressures in the world’s biggest economy remain high. The core rate of inflation (based on the consumer price index but excluding energy and food) rose by 2.7% – the biggest increase since the beginning of 2001. The first-quarter increase was 2.1%.

Strong growth was again reported in Asia. The Asian Development Bank (ADB) predicts that the region’s economies will grow by an average of 7.7% in 2006, with particularly high growth levels expected in China and India. The ADB expects Chinese GDP to grow by 10.4%.

(Sources: International Monetary Fund [IMF], Organization for Economic Cooperation and Development [OECD], Kiel Institute for the World Economy, Asian Development Bank [ADB])

Currency Trends.
The euro has appreciated against the U.S. dollar over the last twelve months. At the beginning of fiscal 2005/2006, one euro was worth around 1.20 U.S. dollars. Following a setback in November 2005, when it fell to under 1.17 U.S. dollars, the euro had reached its highest level of 1.29 U.S. dollars by the end of May 2006. At the end of the fiscal year, it had fallen back to just under 1.27 U.S. dollars.