The gross domestic product (GDP) rose by 4.8% globally in 2010, following a 0.9% decline in the previous year. Dynamic growth in the first half of 2010 was triggered by the expansive monetary and fiscal policies of some countries and the increase in global trade, primarily due to the contribution of emerging countries whose national economies experienced the strongest growth. The main reasons for the slowdown in the second half of the year were structural problems highlighted by the financial crisis – for example in the GIPS countries of Greece, Ireland, Portugal and Spain. These led to a tense situation on the financial markets and increasingly volatile exchange rates.

After a good start in 2010, economic expansion in the U.S. slowed down in the second half of the year. The main reasons for this sluggish growth were the persistent high level of unemployment and the low real estate prices: Falling household budgets caused a drop in private consumption and thus in foreign trade. This effect was heightened further by the low real estate prices.

Throughout the euro zone as a whole, economic recovery remained rather slow in 2010. Exports, investments and consumption developed positively. Economic performance varied strongly in the individual regions: In Germany, GDP grew above-average compared with other European countries. Countries with a high national deficit, which were also affected by the real estate bubble bursting, posted the lowest growth; these were mainly the GIPS countries.

Asia showed the strongest economic recovery of all global regions in 2010, due to a sharp rise in exports and especially construction investment together with an increase in private consumption. Countries like China, India and emerging East Asian markets such as Taiwan and Singapore in particular posted strong growth. In Japan, economic development started to flag slightly during the year.

In the first half of the year, Latin America experienced a sharp upswing, which continued at a more moderate pace in the second half of the year. The main reasons for this were the global economic slowdown, specifically lower demand from the U.S. and China, and the end of the government’s economic stimulus programs.

The cost of energy and raw materials rose again significantly in 2010. As a result, many companies saw their production costs increase and their profits decline, although to a lesser extent. For Fresenius Medical Care, in general, a rise in transport and energy costs of 1% reduces the result after tax by approximately 0.3%. Fresenius Medical Care concludes long-term supply contracts to cushion the impact of high price rises on the Company’s results.

In the previous year, exchange rates were subject to major fluctuations, and this high volatilityVolatilityThis means the price fluctuation of a security or currency. Often this is calculated from the form of standard deviation from the share price history or implicit from a price-setting formula. continued in 2010. Although the U.S. dollar bounced back in the first half of the year after depreciating against other major currencies, the rate fell again in the second half of the year. On December 31, 2010, the U.S. dollar / euro exchange rate was 1.3377, approximately 7% below the previous year’s value of 1.4347; overall for the year, the rate averaged at 1.3270, approximately 5% down on the previous year’s average of 1.3940.

The development of the U.S. dollar and the euro in relation to each other is crucial for Fresenius Medical Care as we generate the majority of our sales in the U.S. and in the euro zone. In reporting terms, an appreciation of the euro is advantageous for us, as our base currency is the U.S. dollar, meaning the balance sheet values achieved in euros are higher (translation effect).

A global network of production sites enables us to meet the demand in our dialysis product business. They are mainly located in the markets they serve, so that costs and revenues are generated in the same currency. We are therefore less affected by longterm currency fluctuations, enabling us to keep our transaction risks, i.e. risks due to foreign currency items or exchange rate fluctuations, to a minimum. In the care business the risk is much lower, because we provide our services at the customer level and therefore in the respective local currency. As this concerns Fresenius Medical Care’s largest area of operations, the currency risk can be classified as minimal overall.

Fresenius Medical Care’s business is affected by the volatility of exchange rates – particularly the euro against the U.S. dollar and the other currencies in our various locations worldwide against the euro generally in the short term. The depreciation of the euro against the U.S. dollar in the financial year 2010 was mainly due to two reasons: the expectation of market players concerning future monetary and financial policy in the U.S. and short-term economic developments in the euro zone compared to local currencies. The positive currency effects from the purchase of goods in euros compared to the U.S. dollar were diminished by the adverse impact of the euro depreciating against the U.S. dollar on the one hand and by negative effects in individual countries, especially the classification of Venezuela as a hyper-inflationary country, on the other. The sensitivity analysis in table 2.1.9 shows to what extent a 10% appreciation of various currencies against the U.S. dollar affects our sales.