Liechtenstein national economy proves resilient

TABLE OF CONTENT FMA Annual Report 2021 15

LIECHTENSTEIN NATIONAL ECONOMY PROVES RESILIENT

The world economy recovered strongly in 2021, but this was increasingly accompanied by supply bottlenecks in global trade and rising inflationary pressure. After challenging months at the turn of the year, the second and third quarters were characterised by a strong recovery of the global economy. Already in the summer, however, the economic outlook became

increasingly gloomy again. Growth in global trade activity turned negative again against the backdrop of supply and transport bottlenecks in global trade, and at the same time, high and rising inflationary pressures in both the real and financial economy caused increasing uncertainty. At the end of the year, the United States recorded its highest inflation rate in nearly 40 years, and inflation in the Eurozone also rose to its highest level since the introduction of the single currency (Chart 3).

Nevertheless, global equity markets were trading close to their record levels at the end of the year, against the backdrop of strongly negative real interest rates. Low real interest rates, depressed risk premiums, and high valuations on the financial markets entail the risk of dramatic price corrections in the event of interest rate or growth shocks. In light of increasing inflation fears and corresponding expectations that the US Federal Reserve will raise interest rates several times,

the equity markets already fell noticeably at the beginning of 2022.

The supply shock in the energy and food sectors triggered by the conflict in Ukraine will further increase the pressure on central banks to tighten monetary policy. Against this backdrop as well, the financial market correction has once again accelerated significantly since the end of February, especially in Europe. The Liechtenstein national economy has recovered faster and more strongly from the pandemic-induced recession than other economies internationally. Compared with larger national economies, Liechtenstein’s gross domestic product (GDP) is usually characterised by higher volatility and is thus especially vulnerable to global economic downturns. The deep recession during the global pandemic nevertheless constituted a striking exception. The rapid recovery of external demand due to the strong rebound in global trade beginning in the second half of 2020 was especially important for Liechtenstein, not only because of the small size of the national economy and the minor role of domestic demand, but also because the

industrial sector is by far the largest economic sector. As a result – and in contrast to most European economies – Liechtenstein’s GDP was able to exceed

its pre-crisis level already in the first quarter of 2021.

Once again, Liechtenstein’s economy was able to demonstrate its high resilience to global macroeconomic shocks, which is also due to several crucial

structural features, including an extremely resilient labour market. Also in Liechtenstein, however, the

subsequent economic slowdown was already noticeable in the second half of the year. The KonSens economic index, which is calculated by the Liechtenstein Institute on a quarterly basis, declined significantly over the course of the year.

The Liechtenstein financial sector remained remarkably stable in the challenging global environment of the past two years. In contrast to banks in the Eurozone and the United States, the decline in profitability in the Liechtenstein banking sector during the Covid19 pandemic was very limited. Instead, the banking sector continued on its growth path and reached a new record level of assets under management in the reporting year, rising to a level of CHF 424.4 billion as of the end of 2021.