Monetary Policy and the Economy Q1/11

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• Monetary Policy and the Economy Q1/11 (PDF, 986 kB) March 2011.

Studies and Analyses

• Global Economy Continues to Recover in a Fragile Environment (PDF, 1 MB) Riedl, Schneider, Schreiner. Riedl, Schneider, Schreiner – Monetary Policy and the Economy Q1/11 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. en global outlook, euro area, central, eastern and southeastern Europe, Austria E2, E3, O1 Mar 31, 2011, 12:00:00 AM

• Austria’s Tax Structure in International Comparison – A Statistical and Economic Analysis (PDF, 1.7 MB) Köhler-Töglhofer, Reiss. Reiss, Köhler-Töglhofer – Monetary Policy and the Economy Q1/11 For several reasons, tax levels and structures are currently at the forefront of the economic policy debate in Austria. We aim to contribute to the scientific basis of this discussion by analyzing the specifics of the tax system in Austria. The meaningfulness of the overall tax rate as an indicator is limited, given that there are numerous options for financing market-related services and given that some economic or social policy goals can be achieved on the revenue or the expenditure side of the budget or both. The problems arising from these facts make it difficult to draw a meaningful international comparison of tax structures. The taxation of labor is above average in Austria, which can be only partly attributed to high social security contributions and the associated high government benefits for employees. Revenues from taxes on property and wealth are exceedingly low in an international comparison, reflecting above all Austria’s very low real property tax and below-average revenues from taxes on financial and property transactions. en tax structure, overall tax ratio, national accounts H20, E01 Mar 31, 2011, 12:00:00 AM

• Administered Prices, Inflation and the Business Cycle – Selected Aspects (PDF, 1.3 MB) Fritzer. Fritzer – Monetary Policy and the Economy Q1/11 The public sector plays a central role in price-setting in some markets for goods and services. Consequently, Eurostat began to publish a new series of inflation indices referred to as the HIPC-AP in early 2010 that summarizes the development of publicly administered prices. This study presents a detailed account of the concept underlying the new series and provides a cross-country analysis for the euro area. Administered prices are a key component of the HICP basket, currently accounting for 11.0% of the HICP (euro area average). This share has declined in the past decade in line with the liberalization of goods and service markets. The inflation rates of administered prices and those of flexible prices (i.e. the HICP excluding administered prices) differ with respect to both their levels and their development over time. In many euro area countries, the average HICP-AP rate of inflation has surpassed the all-items HICP inflation rate over the past ten years. In Austria, as in other euro area countries, flexible prices are found to be a leading indicator for the HICP rather than vice-versa. As public sector pricing takes place within a macroeconomic context, this study also represents a first effort to shed light on the main economic determinants of the development of the HICP-AP. The key findings are that cost-push shocks exercise a significant influence on the inflation of flexible prices, whereas their influence on administered prices is smaller or statistically not significantly different from zero. en price level, inflation, deflation E31 Mar 31, 2011, 12:00:00 AM