Inflationary Pressures Worldwide despite Downturn in Growth

The international environment is increasingly being dominated by a cooling global economy. In the U.S.A., the real estate and financial crisis has spilled over to the real economy. Growth in consumer demand has declined, and the deterioration in the labor market suggests a deepening of this trend. In addition, the leading indicators point to a marked downturn in growth, and major Austrian and international organizations recently downgraded their GDP forecasts for the U.S.A. In the euro area, the economy likewise weakened somewhat in the fourth quarter of 2007. Despite the increased euro exchange rate, net exports made the largest contribution to GDP growth. Domestic demand was driven by gross fixed capital formation while consumer spending was down for the first time since 2001. The latest macroeconomic projections by ECB staff experts anticipate a slowdown in the euro area’s GDP growth for 2008. In February 2008, euro area inflation (based on the HICP) reached 3.3%, a record high since the euro area was created. This rise is primarily attributable to the increase in energy and food prices. The increase in the euro exchange rate occurring in the same period mitigated the inflationary pressures to some extent. The projections for inflation in 2008 were further upgraded. Despite the international financial crisis and its dampening effects worldwide, the Austrian economy looks surprisingly healthy. The OeNB economic indicator of March 2008 signals only a modest downturn in GDP growth for the first half of 2008.