Monetary Policy and the Economy Q3/05

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• Monetary Policy and the Economy Q3/05 (PDF, 656 kB) September 2005.

Studies and Analyses

• Economic Momentum Slows in the Euro Area – Energy Price Developments Have a Negative Impact (PDF, 192 kB) Hildebrandt, Schneider, Silgoner. Hildebrandt, Schneider, Silgoner – Monetary Policy and the Economy Q3/05 The U.S. economy continued to expand in the first half of 2005 despite the strong impact of a further rise in oil prices. However, according to OECD estimates, Hurricane Katrina will dampen economic growth by 0.5 percentage point to 3.1% for the whole year 2005. The Japanese economy remained on its growth path in the second quarter of 2005. The other Asian economies — especially dynamic China — also expanded further. Conversely, GDP growth in the euro area slowed down in the second quarter of 2005. Hit by energy price increases, private consumption generated a marginally negative contribution to growth, while foreign trade and investment made only small positive contributions to growth. Whereas the leading indicators had sent out positive signals since May, these signals recently reversed, so that the outlook for the second half of 2005 deteriorated. Once again, energy price developments are the main culprit; they are also the reason for the persistently high level of inflation. Growth in most of the Central European new Member States (NMS) as well as the EU candidate countries slowed in the first quarter of 2005 compared to the full year 2004. Only in Bulgaria and in the Czech Republic did GDP growth accelerate somewhat. In the second quarter of 2005, economic activity picked up in all Central European NMS save Slovakia, where it remained stable at a high level. After the upward pressure on prices experienced in 2004 — largely as a consequence of EU accession — 2005 is marked by positive base effects, which have helped slow down inflation in the NMS. The Austrian economy, which had enjoyed robust export-driven growth in 2004, lost momentum in the first quarter of 2005 but regained speed in the second quarter. The OeNB's short-term economic indicator points to 1.8% real GDP growth for the full year 2005, which corresponds to a downward revision by 0.2 percentage point compared with the forecast that the OeNB published in June. Despite elevated energy prices, inflation has been going down in 2005 so far. The unemployment rate (Eurostat definition) augmented to 5.1% in July 2005 even though employment surged. en economic developments, Austria. E200, E300, O100 Sep 30, 2005, 12:00:00 AM

• Perceived Inflation in Austria – Extent, Explanations, Effects (PDF, 245 kB) Fluch, Stix. Fluch, Stix – Monetary Policy and the Economy Q3/05 In the euro area countries, the euro cash changeover was accompanied by the development of a significant gap between actual inflation — as measured by the Harmonised Index of Consumer Prices (HICP) — and the inflation perceived by the general public; in Austria, this difference was temporarily up to 1.9 percentage points. The present study shows that the difference in question can in part be attributed to the fact that people 's perception of inflation seems to be based mainly on the prices of goods they buy frequently, whereas official price indices also take into account goods that are purchased less often. According to recent hypotheses on perceived inflation (Brachinger, 2005a), the public furthermore perceives price increases more strongly than price reductions. Since the prices of frequently bought goods rose faster after the cash changeover than those of rarely purchased goods, and a higher (unweighted) share of goods became more expensive, people may have perceived the general price rise to have been more pronounced than it actually was. This perception seems to have been reinforced by the fact that consumers expected prices to rise as a result of the euro cash changeover and that they used outdated schilling reference prices when assessing prices in euro. Moreover, the initial lack of psychological prices may have made it more difficult for consumers to become used to prices in euro. Perceived inflation proved to be unexpectedly persistent: It was not until the beginning of 2005 that the gap between perceived inflation and actual inflation was more or less closed. Since then, the close link between actual and perceived inflation that was prevalent before the euro cash changeover seems to have gradually resurfaced. The fact that the above-mentioned gap opened up again in the middle of 2005 can probably be explained by the sharp increase in oil prices. JEL classification: E31, E50 en inflation, perceived inflation. E31, E50 Sep 30, 2005, 12:00:00 AM

• The Determinants of Consumption Growth in Austria – Results of a Representative Survey (PDF, 173 kB) Janger, Kwapil, Pointner. Janger, Kwapil, Pointner – Monetary Policy and the Economy Q3/05 In the period from 2001 to 2004, Austrian households' consumption expenditure increased by 0.9% per annum in real terms, thus growing 1.6 percentage points more slowly on average than in the period from 1989 to 2000. Subdued consumption growth is attributable not only to economic stagnation, but also to a higher saving rate than is usual at the current stage of the economic cycle. To explain this unusual consumer behavior, numerous hypotheses have been formulated that go beyond the conventional determinants of consumption. In this study, the hypotheses were tested against the results of a representative survey carried out among Austrian households in August 2004. 36% of respondents said they had cut consumption expenditures in the previous 12 months, while 52% claimed to have kept consumption stable and roughly 12% of those surveyed said they had increased consumption expenditures. Among the motives for lower consumption, respondents most frequently cited perceived price increases, the income situation, a pessimistic income outlook and a trend toward smart shopping, while they considered anticipated cuts in pensions or other public benefits, waiting for prices to drop (withholding consumption) and too cautious economic reforms less relevant and geopolitical uncertainties, mounting public debt and liquidity constraints irrelevant. JEL classification: E21 en consumption, Austria Sep 30, 2005, 12:00:00 AM

• An Overview of European Economic Indicators: Great Variety of Data on the Euro Area, Need for More Extensive Coverage of the New EU Member States (PDF, 227 kB) Silgoner. Silgoner – Monetary Policy and the Economy Q3/05 This contribution provides an overview of the most common short-term indicators of economic development in the euro area. These indicators are useful when official data are released with long time lags or if they are subject to major revisions. Indicators based on surveys among businesses, households, financial market analysts or forecasters have the advantage of providing detailed and timely information on individual sectors on a monthly basis and largely without later revision. As an additional instrument, composite indicators, which are calculated by combining a variety of measures into a single indicator with the help of regression and factor analysis, offer an attractive tool for drawing conclusions from different, often divergent signals. Even the most reliable economic indicators, however, can only be interpreted as constituent elements of comprehensive economic analysis. With regard to the new EU Member States, coverage is found to be limited as yet. This study also shows that the forecasting quality of the European Commission 's business and consumer surveys for the new Member States is not as high as for the other EU Member States. As the reliability of economic indicators increases as forecasting institutions and respondents gain more experience, coverage of established indicators should be extended early on to this group of countries, in particular as some of the new Member States may soon join the euro area. JEL classification: 0110, 520 en Leading indicators. Sep 30, 2005, 12:00:00 AM

• Monetary Policy and Financial Stability – Summary of the 33rd Economics Conference of the Oesterreichische Nationalbank (PDF, 80 kB) Schmitz. Schmitz – Monetary Policy and the Economy Q3/05 The 33rd Economics Conference of the Oesterreichische Nationalbank (OeNB)1 on May 12 and 13, 2005, was motivated by the increasing globalization of the banking sector, which raises questions concerning the division of supervision-related costs and the potential burdens of financial crisis management. In order to fulfill their mandate to maintain price stability, central banks have to attach paramount importance to monitoring financial stability. Although the level of central bank involvement in banking supervision differs across the EU, central banks continue to play an important role in guaranteeing financial stability and carrying out banking supervision. Thus, it is vital to integrate financial stability analysis in the wider context of monetary and economic analysis. The OeNB promoted the exchange of views on these issues during its Economics Conference by inviting speakers, who addressed related questions from different points of view, presenting the perspectives of central bankers, supervisory authorities, academics and the financial industry. en Monetary policy, financial stability Sep 30, 2005, 12:00:00 AM