The Economy
Economic Conditions in 2010
The Eurozone economy started to recover in 2010. Real gross domestic product grew by 1.7 per cent after contracting by 4.1 per cent in the prior year, thus remaining substantially lower than before the crisis. The upswing was triggered by exports, but the spring of 2010 saw more and more impetus coming from domestic demand. In addition to companies restocking their inventories, reviving demand for equipment was a key source of business activity. Consumer spending increased only moderately, but steadily.
The economies of the individual Eurozone countries fared very differently. While economies such as Germany, Finland and Slovakia saw substantial growth, recovery was slow or non-existent in countries with high budget deficits and foreign trade imbalances. Government spending cuts and high unemployment in these countries hampered business activity and eroded consumer confidence.
The sovereign debt crisis dominated media and investor attention, although the Eurozone as a whole, and Austria in particular, saw a return to a modest growth path.
Austria is among the top third of the Eurozone economies in terms of performance and bettered the region's average in 2010 with economic growth of 2.0 per cent. In the first half of the reporting period, the Austrian economy profited from the marked export-orientation of its industry. In addition to robust demand from Southeast Asia, the economic upswing in Germany was a key source of stimulus. World trade began to lose some of its considerable momentum in the middle of the year, but another important cornerstone of economic stability began to improve: corporate investment. In addition to the reversal of the inventory cycle, demand for investment goods also started to pick up at the end of the period. In contrast, construction investment declined over the entire year. Unlike other demand components, private consumption did not slide during the recession, and proved to be a key source of support for the economy again in 2010. The savings rate fell for the second year in a row to 10.6 per cent of disposable income.
Austrian consumers showed increasing confidence in the reporting period, and the EU Commission's consumer confidence index surpassed its long-term average in the spring. In addition to the improved economic outlook, a key reason for this was the more optimistic expectations for the labour market. Austria is one of the very few members of the Eurozone that recorded a decline in the jobless rate in 2010. This can of course be attributed in substantial part to the increased training measures being conducted by the national employment service, but the number of jobs also increased. According to Austrian statistics, the seasonally adjusted unemployment rate fell by one half of a percentage point in annual comparison to reach 6.8 per cent.
The general government balance worsened by three percentage points to -3.5 per cent of GDP in 2009 as a result of the financial and economic crisis. The budget deficit rose again to 4.1 per cent of GDP in 2010. This is less cause for concern in international comparison, but does mean that Austria, along with nearly every other member of the Eurozone, has exceeded the threshold specified by the Stability and Growth Pact.
Credit demand in the private sector was very restrained in the reporting period. Corporate financing hit its low point at a year-on-year decline of 1.5 per cent in the first quarter of 2010, and business in this segment has only been expanding slightly for Austrian banks since then. Consumer lending stagnated over the entire reporting period; only demand for housing loans proved to be robust, growing at an average of 2.5 per cent compared to the prior year.
Interest Rates and Exchange Rates
The European Central Bank (ECB) left its key interest rate unchanged at 1 per cent over the year. The so-called "unconventional measures" for providing the banking sector with liquidity were expanded in May when the ECB began purchasing European government bonds on the secondary market to counter the effects of the worsening European sovereign debt crisis. The gradual reduction of the unconventional measures that was initially announced for January 2011 (but that has since been pushed back to April) caused the interbank rates to rise slowly. The three-month Euribor rose by approximately 40 basis points from its low in April to 1.01 per cent at the end of 2010.
However, the positive effects from the low base rate were at least partially eroded by a very volatile development of the credit spreads, thus increasing the refinancing costs for banks.
The bond market was extremely volatile and performed differently from country to country. Yields on German government bonds, the benchmark for the Eurozone, fell substantially in the first eight months of the reporting period and reached an all-time low of 2.11 per cent for ten-year maturities at the end of August. Yields on government bonds from Austria, France and other highly rated Eurozone members developed similarly. In contrast, risk premiums on Greek, Irish and Portuguese government bonds rose dramatically, and Spain, Italy and Belgium saw their spreads increase starting in autumn. Yields for AAA countries rose again in the last months of the year. The ten-year German government bond closed 2010 at 2.96 per cent, and the premium for comparable Austrian government bonds was approximately 50 basis points.
The foreign exchange markets also had a very tumultuous 2010. The nominal-effective Euro exchange rate index, which measures its value against the currencies of its main trading partners, lost 9 per cent in annual comparison. Compared to the individual currencies in the index, the Euro lost the most versus the Japanese yen (-18 per cent) and the Swiss franc (-16 per cent). In June, the Euro reached its low for the year of less than 1.20 USD/EUR, but rebounded to 1.42 USD/EUR by the beginning of November and then fell back to 1.34 USD/EUR in the last two months of the period. Overall, the value of the Euro relative to the world's other major currencies during 2010 was driven primarily by the frequently changing market assessment of the sovereign debt situation in the Eurozone.