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Operating Environment in 2006
The dynamic pace of global economic growth established in 2005 continued into 2006, although the upswing slowed somewhat during the course of the year. Economic expansion nonetheless remained remarkably robust and became much more broadly based. The positive economic trend spurred the employment markets of the major industrialized countries, boosting private consumption. Growth in the emerging economies remained basically robust throughout the year.
The economy of the United States showed very good growth in the first quarter, but weakened markedly as the year progressed due to tighter monetary policy and higher energy prices. Although dampened by the weakness of the real estate market, private consumption remained the U.S. economy’s primary growth engine, with a substantial year-on-year increase. Industry investment also trended very well through the fall of the year thanks to healthy corporate earnings and high capacity utilization, but slowed toward year end.
In Europe, the upswing gained considerable steam, especially in the first half. The strong recovery in Germany, in particular, stimulated the economies of the other E.U. member states, and the euro zone economy has since gathered significant momentum. On top of robust foreign demand, firmer domestic demand also contributed increasingly to economic growth in this region. Private consumption expanded far more strongly than in previous years, thanks primarily to fuller employment. In addition, corporate investment activity picked up during the year thanks to higher capacity utilization and continuing good financing conditions.
In Japan the economy continued to expand, even if the pace of growth temporarily weakened in the summer. Buoyed by the sharp depreciation of the yen, exports rose rapidly and helped to stimulate the economy, but domestic demand proved to be the real growth engine. The improvement in the employment market spurred private consumption, although consumer sentiment deteriorated considerably in the second half. With capacity utilization at a high level, order books well filled and corporate earnings strong, companies were more willing to invest, thereby propping up the economy. By contrast, government spending declined markedly.
The emerging economies in Asia continued their robust expansion in the wake of strong global economic growth, albeit at a slower pace in the second half. These countries benefited particularly from high export demand from China, Japan and the United States, while private consumption showed a slight decline almost throughout the region. A general increase in interest rates dampened corporate investment activity. Despite government efforts to check the pace of expansion, the Chinese economy again showed rapid growth, which continued to be driven by domestic demand. Investment posted a double-digit increase and private consumption boomed. Exports again grew strongly in addition, despite the slight appreciation of the yuan.
The economy remained strong in most countries of Latin America thanks to robust domestic demand and the sharp rise in raw material prices in the first half of 2006, which benefited the raw material exporters. Private consumer demand rose considerably, spurred by higher real incomes. The region’s economy is thus increasingly broadly based. The Mexican economy evolved better than expected during the year, with high crude oil prices and continuing steady demand from the United States resulting in stable growth despite political turbulence. Argentina and Venezuela also developed well, but had to contend with high inflation rates. The only exception to this favorable overall picture was Brazil, where growth was comparatively moderate.
The prescription medicines market posted stable growth of more than 6 percent in 2006, although the pace of expansion was down slightly compared to the prior year. Trends varied greatly by region and product segment. In North America, the U.S. pharmaceuticals market recovered, expanding slightly faster than the average, as was already the case in Canada. The major U.S. companies saw sales of some blockbuster drugs fall dramatically due to numerous patent expirations, but these declines were offset by significant gains for cancer drugs and other specialty pharmaceuticals. Europe continued to suffer from the health care policy environment, with the result that below-average growth was recorded in all countries. Cardiovascular products and antibiotics, in particular, showed a very weak trend, while cancer drugs posted double-digit growth rates. The Japanese market stagnated due to the government’s biennial price cuts, which took place in April. Emerging markets such as Brazil, Mexico and China made particularly large contributions to the overall expansion in the sector. In these markets, unlike those of the highly industrialized countries, growth was strongest in the traditional primary care segments such as cardiovascular risk management and metabolic disorders.
The crop protection market weakened in 2006 due to adverse weather conditions in the major agricultural regions and the weakness of the Brazilian farming economy. Agriculture was additionally hampered by high energy and fertilizer prices. The North and Latin American markets, in particular, recorded sharp declines, though in Latin America there was some improvement toward the end of the year. The European market held steady year on year after conditions improved in the second half. The Asian market as a whole trended slightly downward. In China, however, rising demand and the switch to modern chemical products led to strong growth.
The three major industry sectors relevant to Bayer MaterialScience registered good to above-average growth in 2006.
The expansion of the automotive industry in 2006 was spurred by strong growth in Asia – particularly in China and India and also in Japan, which is still the region’s largest producer. By contrast, the automotive sector shrank in western Europe and North America, the regions where there is high replacement demand. The decline in western Europe was partly the result of a shift in production toward eastern Europe and the Middle East. The slump in car sales in the United States particularly impacted the big three U.S. producers, which failed to respond to the growing demand for more fuel-efficient vehicles.
The global construction industry posted growth of 3 percent in 2006, thanks to the positive trend not only in Asia and Latin America, but also in eastern Europe, Africa and the Middle East. On the heels of market weakness in recent years, there was a gratifying performance in western Europe, due partly to the turnaround in Germany. In the U.S. residential construction stagnated, while the non-residential segment showed good growth.
The electrical and electronics sector again proved the most dynamic of the three, driven by brisk demand for capital equipment in areas such as automation technology, along with innovative products for the consumer electronics and communications technology markets. All regions contributed significantly to this industry’s expansion in 2006, led by China with double-digit increases.
The economy of the United States showed very good growth in the first quarter, but weakened markedly as the year progressed due to tighter monetary policy and higher energy prices. Although dampened by the weakness of the real estate market, private consumption remained the U.S. economy’s primary growth engine, with a substantial year-on-year increase. Industry investment also trended very well through the fall of the year thanks to healthy corporate earnings and high capacity utilization, but slowed toward year end.
In Europe, the upswing gained considerable steam, especially in the first half. The strong recovery in Germany, in particular, stimulated the economies of the other E.U. member states, and the euro zone economy has since gathered significant momentum. On top of robust foreign demand, firmer domestic demand also contributed increasingly to economic growth in this region. Private consumption expanded far more strongly than in previous years, thanks primarily to fuller employment. In addition, corporate investment activity picked up during the year thanks to higher capacity utilization and continuing good financing conditions.
In Japan the economy continued to expand, even if the pace of growth temporarily weakened in the summer. Buoyed by the sharp depreciation of the yen, exports rose rapidly and helped to stimulate the economy, but domestic demand proved to be the real growth engine. The improvement in the employment market spurred private consumption, although consumer sentiment deteriorated considerably in the second half. With capacity utilization at a high level, order books well filled and corporate earnings strong, companies were more willing to invest, thereby propping up the economy. By contrast, government spending declined markedly.
The emerging economies in Asia continued their robust expansion in the wake of strong global economic growth, albeit at a slower pace in the second half. These countries benefited particularly from high export demand from China, Japan and the United States, while private consumption showed a slight decline almost throughout the region. A general increase in interest rates dampened corporate investment activity. Despite government efforts to check the pace of expansion, the Chinese economy again showed rapid growth, which continued to be driven by domestic demand. Investment posted a double-digit increase and private consumption boomed. Exports again grew strongly in addition, despite the slight appreciation of the yuan.
The economy remained strong in most countries of Latin America thanks to robust domestic demand and the sharp rise in raw material prices in the first half of 2006, which benefited the raw material exporters. Private consumer demand rose considerably, spurred by higher real incomes. The region’s economy is thus increasingly broadly based. The Mexican economy evolved better than expected during the year, with high crude oil prices and continuing steady demand from the United States resulting in stable growth despite political turbulence. Argentina and Venezuela also developed well, but had to contend with high inflation rates. The only exception to this favorable overall picture was Brazil, where growth was comparatively moderate.
The prescription medicines market posted stable growth of more than 6 percent in 2006, although the pace of expansion was down slightly compared to the prior year. Trends varied greatly by region and product segment. In North America, the U.S. pharmaceuticals market recovered, expanding slightly faster than the average, as was already the case in Canada. The major U.S. companies saw sales of some blockbuster drugs fall dramatically due to numerous patent expirations, but these declines were offset by significant gains for cancer drugs and other specialty pharmaceuticals. Europe continued to suffer from the health care policy environment, with the result that below-average growth was recorded in all countries. Cardiovascular products and antibiotics, in particular, showed a very weak trend, while cancer drugs posted double-digit growth rates. The Japanese market stagnated due to the government’s biennial price cuts, which took place in April. Emerging markets such as Brazil, Mexico and China made particularly large contributions to the overall expansion in the sector. In these markets, unlike those of the highly industrialized countries, growth was strongest in the traditional primary care segments such as cardiovascular risk management and metabolic disorders.
The crop protection market weakened in 2006 due to adverse weather conditions in the major agricultural regions and the weakness of the Brazilian farming economy. Agriculture was additionally hampered by high energy and fertilizer prices. The North and Latin American markets, in particular, recorded sharp declines, though in Latin America there was some improvement toward the end of the year. The European market held steady year on year after conditions improved in the second half. The Asian market as a whole trended slightly downward. In China, however, rising demand and the switch to modern chemical products led to strong growth.
The three major industry sectors relevant to Bayer MaterialScience registered good to above-average growth in 2006.
The expansion of the automotive industry in 2006 was spurred by strong growth in Asia – particularly in China and India and also in Japan, which is still the region’s largest producer. By contrast, the automotive sector shrank in western Europe and North America, the regions where there is high replacement demand. The decline in western Europe was partly the result of a shift in production toward eastern Europe and the Middle East. The slump in car sales in the United States particularly impacted the big three U.S. producers, which failed to respond to the growing demand for more fuel-efficient vehicles.
The global construction industry posted growth of 3 percent in 2006, thanks to the positive trend not only in Asia and Latin America, but also in eastern Europe, Africa and the Middle East. On the heels of market weakness in recent years, there was a gratifying performance in western Europe, due partly to the turnaround in Germany. In the U.S. residential construction stagnated, while the non-residential segment showed good growth.
The electrical and electronics sector again proved the most dynamic of the three, driven by brisk demand for capital equipment in areas such as automation technology, along with innovative products for the consumer electronics and communications technology markets. All regions contributed significantly to this industry’s expansion in 2006, led by China with double-digit increases.
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