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Sovereign Debt Crisis Delays Economic Recovery

Gerhard Fenz (), Isabella Moder and Maria Silgoner
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Gerhard Fenz: Oesterreichische Nationalbank, Economic Analysis Divison,

Monetary Policy & the Economy, 2012, issue 3, 5–22

Abstract: The U.S. economic recovery lost steam in the first half of 2012. Whereas positive signals have been coming from the real estate sector in recent months, the uptrend in the labor market has not gained a stable foothold yet. Up to now, domestic demand has been the main engine of economic growth. However, the envisaged drastic fiscal consolidation could considerably dampen consumer spending and investment. Japan’s economic growth also slowed down noticeably in the second quarter of 2012, which may be pinpointed to a large extent to the expiration of subsidies for the purchase of eco-friendly cars. In the next few years, Japan will have to tackle the reduction of its debt ratio (2013: 220% of GDP). The value added tax is already scheduled to be raised to 10%. The Chinese government and the People’s Bank of China reacted to the significant cooling of the Chinese economy by taking expansionary fiscal and monetary policy measures. The IMF projects a “soft landing” for the Chinese economy. In the euro area, economic output diminished by 0.2% in the second quarter. The economy has not moved into a recession yet, but the current decline in the leading indicators along with the available forecasts presage a slight drop in growth in the third quarter of 2012 as well. The recovery is expected to take hold no earlier than around the turn of the year 2012 to 2013. Developments within the euro area remain quite heterogeneous. The motor of growth so far, the German economy, is increasingly losing momentum. The downtrend in inflation came to a halt in August 2012. In addition to increases in taxes and fees, which drive inflation upward, world market prices for food have been surging recently. In July 2012, the Governing Council of the ECB cut key interest rates by 25 basis points, bringing the interest rate on main refinancing operations to a historical low of 0.75%. In early September 2012, the Governing Council of the ECB initiated a new government bond purchase program, so-called Outright Monetary Transactions (OMTs). Under the OMT program, the Eurosystem may make secondary market purchases, limited neither by volume nor by time, of sovereign bonds issued by countries that are eligible for and have applied for EFSF/ESM support for their macroeconomic adjustment programs. Together with the envisaged steps toward a banking union, this measure is an important element in calming the markets and thus in resolving the government debt crisis. Quarter-on-quarter economic growth in the Central, Eastern and Southeastern European (CESEE) Member States was slightly positive in the first two quarters of 2012, and growth in the region is projected to quicken in 2013. Inflation was fueled most heavily by energy prices, but eased noticeably in the course of the first half of 2012. The region’s external balances performed quite heterogeneously, but any deficits registered in the combined current and capital accounts were moderate in size. Conditions in the financial markets have stabilized noticeably in all countries except Slovenia since the beginning of June 2012. The Austrian economy is increasingly affected by the economic slack in Europe. Whereas GDP growth was still surprisingly powerful in the first quarter of 2012, coming to 0.5% (seasonally and working-day adjusted, quarter on quarter), it came to a near standstill in the second quarter (+0.1%). Most of the leading indicators which have come in are negative and signal below-average growth in the next few months. Nevertheless, given the strong economic performance in the first quarter of 2012, the 0.9% growth forecast in the June 2012 economic outlook of the Oesterreichische Nationalbank (OeNB) for 2012 could yet hold true. The risks to economic activity in 2013 would, however, rise considerably if growth weakened further in the second half of 2012.

Date: 2012
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