2. Underlying economic conditions
2.1 Overall economic situation
In 2008, the global economy saw a trend reversal following years of expansion. The downturn intensified in the second half of the year, and had affected practically all regions of the global economy by the end of the year. The reason for this was the culmination of the financial market crisis in the USA in September 2008, which shocked the entire global economy. Negative knock-on effects led to an unusually strong downward trend in the industrial sector, which increasingly affected other countries. The world’s gross national product grew by 3.4 percent (2007: 5.2 percent), driven by continued positive development on average across the year in emerging nations, particularly China. In the USA, a strong downward trend was reported over the course of the year. This downward trend could be seen in Germany at the end of the year as well.
Performance of significant currencies
The foreign currencies of greatest importance to Software AG’s development are the U.S. dollar, the British pound, the Brazilian real and the Japanese yen. On average for the year, the U.S. dollar was weaker against the euro compared to the previous year, but gained significant ground toward the end of the year and strengthened its position against the euro.
The following table shows the exchange rates of the currencies against the euro year on year:
Closing rate (€1) | Dec. 31,2008 | Dec. 31, 2007 | Change in % |
U.S. dollar | 1.3976 | 1.4718 | 5.0% |
Brazilian real | 3.2574 | 2.6208 | -24.3% |
Pound sterling | 0.9589 | 0.7347 | -30.5% |
Japanese yen | 126.40 | 165.10 | 23.4% |
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Average rate (€1) | 2008 | 2007 | Change in % |
U.S. dollar | 1.4705 | 1.3700 | -7.3% |
Brazilian real | 2.6714 | 2.6629 | -0.3% |
Pound sterling | 0.7967 | 0.6845 | -16.4% |
Japanese yen | 152.28 | 161.18 | 5.5% |
Source: Commerzbank
USA
The negative trend of the previous year continued through 2008 in the U.S. The increase in the gross domestic product was just 1.1 percent, compared to 2.0 percent the previous year. Following a surprisingly positive first half, caused by strong foreign trade and the effects of the economic stimulus package, the forces of recession became increasingly apparent in the third quarter. The main reason was the 3.7 percent fall in private consumption, the biggest drop since 1980. In the second half of the year, only foreign trade and government spending propped up the markets. The financial and real estate crisis hit the USA particularly hard. Investment activities, which were already very limited, were further reduced by restrictions on the granting of loans resulting from the financial crisis.
Europe
The European economy also suffered from the economic and financial crisis, particularly in the second half of the year. At the end of 2008, the euro zone experienced a recession for the first time since the currency union came into force. In 2008 it posted total growth of just 1.0 percent, compared with 2.6 percent the previous year. In the European Union, growth was 1.3 percent (2007: 3.1 percent). Several factors caused the slowdown in the economy: Into the third quarter, high inflation caused a fall in private consumption; in addition, exports suffered as a result of the downturn in the global economic situation. Companies were therefore more reluctant to invest. The situation was made worse by adjustments on the real estate markets and the impact of the problems on the international financial markets, particularly toward the end of the year.
With a gross domestic product (GDP) of 1.3 percent (2007: 2.5 percent), the German economy performed better than the euro zone average. However, since the end of 2008, the German economy has also been in recession. The main contributing factor here was the fall in exports caused by the weaker economic position of trading partners. The economic development in Eastern Europe was also slower, with a 3.2 percent increase compared with the previous year (5.4 percent).
Asia
The economy in Asia continued to grow at a dynamic pace in 2008 but in the second half was not immune to the global economic situation. As a result, production also slowed significantly in the third and fourth quarters in countries in the Asian region. The expansion phase that began in 2002 in Japan came to an end in 2008. Production across the whole economy fell significantly as of the spring. The Japanese economy thus shrunk by 0.3 percent (2007: + 2.4 percent). With an improvement of 9.0 percent, China failed to achieve economic growth of more than 10 percent for the first time in five years. In the last quarter of the year, in particular, the downturn in the global economy also hit China, in particular in terms of falling exports. In the emerging Asian economies, growth was 7.8 percent, compared to 10.6 percent in 2007.
Latin America
After six years of strong growth and an average increase in the gross domestic product of around 4.8 percent per year, Latin America was also affected by the global financial and economic crisis in 2008. However, the gross domestic product still increased by 4.4 percent. Negative factors were the drop in exports to industrialized nations and the major fall in prices for raw materials such as oil and precious metals. With GDP growth of 5.8 percent, Brazil was slightly above the previous year's figure (5.7 percent).
2.2 Sector trend
The ICT market (market for information technology, telecommunications and consumer electronics) encompasses the IT and the telecommunications sector. The IT market includes IT accessories (hardware), software and IT services segments. The telecommunications sector consists of network infrastructure, telecommunications equipment for consumers and telecommunications services. As a provider of systems software, Software AG pertains to the software market segment of the ICT industry. In 2008, software accounted for approximately 19 percent of the global IT market and almost 8 percent of the ICT market.
ICT market
According to calculations by the European Information Technology Observatory (EITO), the global market volume for information and communications technology (ICT) grew by almost 6 percent to approximately €2,363.4 billion in 2008. The USA and the countries of the European Union are the strongest regions, each with a share of approximately one third of the total volume. In the European Union, the market grew by 3 percent to approximately €682.6 billion. The largest single market – Germany – grew by 1.3 percent to €133.0 billion.
IT market
Within the technology sector, information technology exhibits the highest growth rates. Worldwide, the IT market grew by around 5.3 percent to €964.6 billion in 2008, according to information from EITO. In the European Union, the IT market expanded by 4.2 percent to €311.1 billion, and the German market also grew by 4.2 percent to €66.6 billion.
Software market
As in previous years, the software market exhibited the strongest growth within the ICT industry worldwide in 2008. According to information from EITO, the global software market grew by 6.7 percent to €185.0 billion and the European Union market by 5.3 percent to €58.6 billion. The German software market saw a 5.3 percent increase to €14.6 billion.
2.3 Changes in legal requirements
During 2008, there were no changes in legal requirements that had a significant impact on our business.
