2007, intensified considerably last fall. failures and near - failures of some major financial institutions greatly undermined confidence in financial institutions and severely disrupted financial markets, leading to a further sharp tightening of credit conditions. risk spreads, which were already elevated, escalated further and equity prices fell. in addition, the financial turmoil contributed to a sharp decline in consumer and business confidence. the result was a major pullback in spending as consumers responded to decreases in wealth and the deterioration in their future employment prospects and as businesses, worried about the demand for their products, cut back on capital spending and sharply reduced production to avoid an accumulation of unsold stocks. a gradual decline in economic activity through most of 2008 took a decided turn for the worse late in the year. the policy response because the threat to economic stability in the current episode has been so closely related to problems in the financial sector, most of the policy responses have been focused on financial institutions and markets and the flow of credit to households and businesses. many of these policies have been aimed at countering the tightening of financial conditions that occurred as lenders became more risk averse and took steps to conserve capital and liquidity. to that end, the federal reserve has lowered interest rates, made backup sources of liquidity available to private lenders, and used its own lending capacity to try to revive a variety of financial markets. in addition, the federal reserve, the treasury, and the federal deposit insurance corporation ( fdic ) have taken a number of steps to stabilize and repair financial institutions in order to limit the tendency of those institutions to pull back from lending and thereby intensify the decline in spending. other government policies operate at the intersection of the financial and real sectors. foreclosure mitigation, for example, not only serves to keep people in their homes, but also should reduce downward pressures on house prices and hold down loan losses at lenders. finally, fiscal stimulus works directly on demand, in effect bypassing the financial sector in its first - round effects ; by strengthening aggregate demand, it too should help alleviate strains on lenders and contribute to stemming the vicious cycle. although i'll be discussing each of these policy initiatives separately, it is important to keep their interactions in mind. they all attempt to break into that adverse feedback loop we've been talking about at different points in the chain of cause and effect and then cause again. the expectation of recovery rests importantly on the natural recuperative powers of the economy, but it also

should decline. exports of equipment goods, demand for which is known to be cyclical, will be affected. in most countries, difficulties in sales and distribution, on the one hand, and restrictions on lending conditions, on the other hand, have prompted a downward revision of investment plans. the us and europe are cases in point, but a loss of momentum is also being observed in emerging markets. these developments will weigh heavily on our exports of equipment and intermediate goods. the substantial decline in demand for vehicles made by us and european manufacturers will also impact on their swiss - based suppliers. the metals, machinery and electronics industry was the first to experience a sharp correction in new orders. the worsening outlook for sales will lead to an adjustment of investment plans in switzerland as well. domestic demand for equipment goods could even turn out to be the most severely affected component of final demand. developments have been slightly different for the construction sector and its most important component, residential investment. housing construction has been in decline for the past few years, although the cut in interest rates could now halt this trend. all these factors have brought about a sharp deterioration in business confidence, which should put a damper on job creation in our country. unemployment will start to rise again. consumption should continue to grow, but at a considerably slower pace. the household sentiment indicator was sharply down at the beginning of the fourth quarter, reflecting expectations of greater job insecurity. in contrast, the unexpected fall in inflation will contribute to an increase in real income, which will support consumption. for 2009 as a whole, the snb is forecasting a decline in real gdp. this decline is likely to lie between 0. 5 % and 1 %. changes in monetary and financial conditions as i mentioned in my opening remarks, the target range for the three - month libor has already been cut by 175 basis points in three steps since our september assessment. these successive cuts were rendered necessary by a number of factors that contributed to a tightening of monetary conditions, whereas the deteriorating general economic environment called for relaxation. i need only mention, in this regard, the brief but rapid ascent of the swiss franc in october, or the surge in credit risk premia on the bond markets. these movements have since been partly reversed, but tensions remain. these remarks serve to illustrate a more general observation : unfavourable economic developments combined with a financial crisis can impair the transmission of monetary policy, and hence compromise its effectiveness. the expansionary effect of an