Annual Financial Statements 2010 of Bank Austria

Management Report
Management Report (CONTINUED)
Outlook
Global economic trends
� After a temporary slowdown in summer 2010 the global economy
started to gather momentum around the turn of the year. We
expect overall growth to reach 4.5% (weighted by purchasing power)
in 2011 – and also in 2012. China was the first country to manage
the turnaround after the financial market crisis, and will remain the
major provider of impetus with growth rates of just below 10%. The
Third World economy as a whole will expand by 6.5%. The combined
GDP of industrialised countries, on the other hand, is expected to
grow at a disproportionately low rate of 2.5% in the next two years.
With the inventory cycle now past its final stage, and with the effects
of the backlog boom now receding, global economic performance will
be dampened by the switch from fiscal incentives to consolidation.
Higher commodity prices and a more restrictive monetary policy are
also having an impact. GDP growth in the US, which was comparatively
low in summer 2010 at a level between 1.75% and 2.5% (on
an annualised basis), started to rise towards year-end 2010. At the
same time there were increasing signs of a self-sustaining upswing.
On this basis we expect the US economy to grow by 3.3% in the
current year (2012: +2.7%), also in light of recent decisions concerning
massive tax reductions. It is nevertheless unlikely that interest
rates will be raised in the near future. As persistent (mediumterm)
economic risks outweigh fears of inflation, the additional measures
of quantitative easing will probably be implemented. The Fed is
not expected to abandon its zero rate policy before the beginning of
2012 (current target rate: 0%-0.25%). The expansionary economic
policy also involves risks: the US fiscal position is precarious and
convincing plans for consolidation are not in sight. This is weakening
the US dollar – in fundamental terms at least – and suggests future
volatility. The heterogeneous character of world economic trends and
increasing imbalances in the global balance of payments also put a
question mark over future developments.
� Although the pronounced countermovement to recession in 2010
is tapering off, the euro area got off to a better-than-expected start
in 2011. In Germany, the high level of export-driven industrial activity
has stimulated domestic demand. The same applies to France. This
benefits economies such as Austria and countries in CEE/Central
Europe, which have close economic links with the large euro area
countries. The upswing in the core countries has largely become selfsustaining.
Nevertheless, massive fiscal consolidation measures and
wide variations in terms of productivity in the euro area will curb
economic growth. In 2011, the euro area’s GDP should be able to
grow by 1.7% in real terms. Strong growth in the core countries and
imported price increases are preparing the ground for subsequent
effects and inflationary expectations. Despite the continued debt
crisis, recurrent doubts about the solidarity of European banks and
Eurosystem members’ varying use of facilities made available by the
European Central Bank, the ECB will raise its main refinancing rate,
currently at 1%, in the spring, thus initiating the end of the low interest
rate phase. Long-term interest rates will continue to move closely
in line with US rates. It is not until summer 2011, when the Fed’s first
step to raise interest rates will also appear on markets’ time horizon,
that long-term yields will also turn upwards for a sustained period. We
expect that by the end of 2011, yields on 10-year Treasury bonds will
have risen to 4% and the euro benchmarks to 3.5%. On this basis
we will see an upward shift and some flattening of the yield curve.
Interest rate spreads of highly indebted euro member states will
remain high. Debt ratios are rising further for the time being and rollover
problems continue to exist, despite the austerity measures put in
place. The rescue fund is likely to be used by additional countries.
The markets have so far not been convinced by efforts to find a solution
with a credible medium-term consolidation path and a European
set of rules including the possibility of imposing sanctions.
Economic outlook for our markets
� Overall, the economies in Central and Eastern Europe (CEE) have
returned to a stable growth path. Economic growth (CEE 17 without
Poland) of 3.6% in 2010 compares with a strong contraction of 5.9%
in the crisis year 2009. In the current year and in 2012, growth is
expected to reach 3.8% and 4.2%, respectively. The momentum will
accelerate as countries which are currently lagging behind in the
cycle, mainly economies in South-East Europe, catch up over time
(see table). GDP growth, a general indicator of economic developments,
is reviving across the region without any exceptions.
The starting position differs widely within CEE, depending on a country’s
output structure and the degree of international integration.
As Turkey achieved very strong growth already in 2010 (+7.1%),
growth rates will return to normal levels there in 2011 and 2012
while remaining above average at 4.1% and 5.1%, respectively.
The CIS countries which are major exporters of raw materials are also
expected to record stable economic growth of over 4% (Russia) and
over 5% (Ukraine and Kazakhstan). The highly integrated export-
oriented countries in Central Europe will benefit from strong expansion
in the European core area, with growth rates exceeding those for
the euro area as a whole (+2.3% in 2011 and +3.5% in 2012).
Hungary is a special factor with its economic policy geared to autonomous
development. The only country group which is still affected by
the repercussions of the crisis and by the need for adjustment is
South-East Europe, primarily Romania and the Balkan countries
Croatia and Bosnia.
While there are considerable differences among the countries in Central
and Eastern Europe, it should be noted that all of them were quick
to respond to the new environment through their economic policy.
All of these countries took determined action to address the twin
deficits – external and domestic debt – and some of them did so with
IMF/EU support. In this way they successfully dealt with the risk of
contagion emanating from the debt crisis in the peripheral countries
of the euro area, and now their debt ratios are comparatively low.
Expressed as a percentage of GDP, the average public sector deficit in
Bank Austria · Annual Financial Statements 2010
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