Global Economy Continues to Recover in a Fragile Environment

U.S. economic growth has been gaining momentum, with the annualized growth rate of real GDP reaching 3.1% in the fourth quarter of 2010. Factoring in this good performance, the IMF has revised upward its economic outlook for 2011 by 0.7 percentage points to 3.0%. At the same time, the labor market has been slow to improve, and housing markets are still adjusting; hence the contribution of labor and housing to economic growth has been rather moderate. Furthermore, the devastating earthquake in Japan hit the economy at a time when the recovery of economic activity was still fragile. Judging from previous experience with earthquakes, international organizations expect the setback in Japanese growth to be temporary, however. The growth effect might swing back into positive territory as reconstruction efforts accelerate in the second half of 2011. Given the limited openness of the Japanese economy, the repercussions on the world economy are likely to remain subdued. The Bank of Japan (BoJ) moved to support the economy by providing ample liquidity and expanding its purchases of securities from the private sector. The G-7 economies joined forces to intervene against the strong appreciation of the Japanese yen in the days following the earthquake. The year 2010 saw China emerge as the second-largest economy worldwide behind the United States, measured at current GDP prices. The IMF expects the Chinese economy to grow by 9.6% in 2011. The Chinese central bank responded by raising minimum reserve requirements a few times and by increasing its key monetary policy rates three times to keep the economy from overshooting. The renminbi has appreciated by close to 4% since China returned to a more flexible exchange rate arrangement in 2010. Euro area real GDP grew by just 0.3% quarterly in the fourth quarter of 2010. Euro areawide unemployment reached 9.9% in January 2011, just 0.2 percentage points short of the 12-year peak recorded in October 2010. ECB staff projections for GDP growth in 2011 are within a range of 1.3% and 2.1%. Reflecting commodity price increases, the annual growth rate of HICP inflation has been trending upward since mid-2010, standing at 2.4% in February 2011. While the economic recovery implied a reversal of public debt dynamics in most euro area countries, the high debt levels of some euro area countries continued to cause turbulence. Exacerbated by the downgrading of ratings for Greece Portugal and Spain, the spreads payable on sovereign bonds issued by peripheral European countries remained elevated. In the spirit of European solidarity, a permanent crisis mechanism – the European Stability Mechanism – has been established in the euro area, which will become operational in mid-2013. The gradual economic recovery in Central, Eastern and Southeastern European (CESEE) EU Member States continued in the second half of 2010. The business cycles of the countries in the area reconverged somewhat, and domestic demand gained momentum as a driver of growth. These developments were underpinned by a stabilization of current account balances, following a significant recovery of those positions during the recent years of subdued economic growth. Rising food prices and tax increases in a number of countries stoked inflation in recent months, prompting a number of central banks to raise their key monetary policy rates, thereby initiating a reversal from the broadly accommodative stance adopted in the period of crisis. The Austrian economy, finally, is in very good shape notwithstanding a number of risk factors. The key engine of growth has been the manufacturing industry, which has begun to invest again given strong export growth, whereas the construction sector continues to contract. The OeNB’s short-term economic indicator results point to above-average growth in the first half of 2011. These developments will, in turn, continue to improve labor market conditions, which are already favorable. The surge in energy and commodity prices has caused inflation to rise strongly lately; the rate hit 3.1% in February 2011.