The economic environment.

The recovery of the global economy continued in 2010 thanks to the acceleration in global trade and the expansionary monetary and fiscal policy of leading economic nations. According to a forecast by the OECD, the global economy may have grown by 4.5 percent in 2010 after contracting by 1 percent in 2009. Global economic output increased much faster than forecast a year ago, particularly in the first half of 2010. Yet, the pace of this recovery slowed slightly toward the end of 2010 when a number of economic stimulus packages came to an end in the industrialized countries and the resulting “push effects” weakened. This trend was not compensated completely by self-supporting growth.

The growth engines in 2010 were the emerging economies, which accounted for around 70 percent of growth worldwide. According to OECD forecasts and initial estimates, the economic upturn was perceptibly weaker and increasingly disparate in the majority of industrialized nations: Germany, the driver of the EU economy, recorded growth of 3.6 percent in the reporting year, outstripping the euro zone countries with their 1.7-percent growth. After starting the year on a strong note, the U.S. economy posted subdued growth. Viewed from a historical perspective, the growth rate of 2.8 percent was rather moderate. The core countries in our Europe operating segment also presented an uneven picture. Poland, Slovakia, and the Czech Republic show fairly good growth rates of 2.5 to 4.5 percent, whereas the economies of Greece, Romania, and Croatia contracted by between 2 and 4 percent year-on-year. The Netherlands, Austria, and Hungary recorded moderate growth rates of 1 to 2 percent.

Conditions on the labor markets also diverged considerably during 2010. Germany recorded a very positive trend in its labor market, due in particular to a flexible labor market policy in the form of reduced working hours, but also to a return to a healthy level of exports. Unemployment fell to 7.2 percent at the end of the year. However, in many other Western industrialized nations and core countries of Deutsche Telekom, unemployment is still close to the record levels seen in 2009 during the crisis. In the United States, the unemployment rate remained high at 9.4 percent. Countries with substantial national debt that have introduced austerity programs and fiscal policy measures are in a particularly dire macroeconomic situation, coupled with even higher unemployment.

Our business in the reporting year was impacted by strong competition, intensified regulatory intervention, and the resulting price erosion.

The upswing in the global economy and the slight increase in consumer demand in most of our core markets were able to support the business environment only to a limited extent and were not a major source of impetus. A negative or continuous braking effect was apparent in countries where purchasing power is still falling. As a result of the high pressure on individual countries to consolidate their public finances, some of them raised existing or imposed new taxes on telecommunications companies in 2010. This had a negative impact on both consumption and on the telecommunications companies. In telecommunications, the economic crisis will continue to impact the markets in Southern and Eastern Europe in 2011. In some countries, governments will endeavor to improve the financial situation through fiscal policy intervention.

Total revenue from telecommunications services in Germany decreased by more than 1 percent in 2010 to approximately EUR 61 billion. Fixed-network revenue was down 3.5 percent in this period compared with the previous year. Mobile communications business partially compensated for this decrease with a slight revenue increase of 0.8 percent.

In the reporting year, prices for (fixed-network and mobile) telecommunications services overall declined 2.0 percent year-on-year. Prices for fixed-network and Internet services declined by 1.8 percent, while prices for mobile voice and data connections were down 2.8 percent.