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15.12.2006

BA-CA Economic Indicator:
Consumption assumes mantle from exports, yet growth still weaker in 2007

  • 2007 growth will remain above average at 2.4 percent
  • But poorer conditions overall will cost more than one percent
  • Consumption revival will bring only partial relief

In November, the business indicator of Bank Austria Creditanstalt (BA-CA) rose once again, moving from an adjusted 4.1 in October to 4.2. "Despite its already lofty position our indicator continued to rise in November", said Marianne Kager, chief economist at BA-CA. Looking at the components of the indicator, there were further improvements in sentiment for industry in the euro area as well as for Austrian consumers. Austrian industry is still flying high. "The sentiment at the end of the year indicates that growth has been strong in the fourth quarter as well", said Stefan Bruckbauer at BA-CA.

This means that the Austrian economy will achieve year-on-year growth of over 3 percent in the fourth quarter too, bringing the annual average to 3.2 percent according to BA-CA. Moreover, the indicator also reveals that this strong economic activity is set to continue throughout the first quarter of 2007, but nevertheless, the economic experts at BA-CA are assuming annual average growth in 2007 will be noticeably lower than in 2006, coming in at 2.4 percent.

Overall conditions not attractive for 2007, but growth still above the average

With growth anticipated at 2.4 percent, Austria will still be able to expand above its potential in 2007 according to the economists at BA-CA. However, this rate will fall short of the 2006 average. "The overall conditions for the Austrian economy will be poorer in 2007 than in 2006, or than the period from 1998 to 2000, when Austria was able to grow at over 3 percent for three consecutive years", said Kager.

The slowdown in the global economy and the strong euro will prevent a return to the strong rates of growth posted from 1998 to 2000, when the Austrian economy expanded on average by 3.4 percent each year, believe the experts at BA-CA. Between 1998 and 2000 growth in the USA hovered around 4 percent, while the euro area also accelerated from 2.7 percent to 4 percent. In 2007 the USA is expected to fall to a rate of marginally over 2 percent after growth this year totalling more than 3 percent, while the euro area should just reach 2 percent following its 2.7 percent growth in 2006. The euro will barely lose against the dollar in 2007 either, settling at approximately 1.30. By contrast, from 1998 to 2000 the euro was at an all-time low, sitting at 0.83 in the middle of 2000 and seeing its annual average fall from 1.11 in 1998 to 0.92 in 2000.

Despite the ongoing confidence in the euro area, the weaker overall conditions in the global economy including the stronger euro and rising interest rates will shave more than 1 percent off growth in Austria in 2007 compared to 2006. Parallel to this, however, private consumption will be boosted by the improvement on the labour market, the low rate of inflation and the better consumer sentiment after three years of growth totalling 2 percent and more. BA-CA assumes that private consumption growth will total 2.2 percent in 2007, the highest rate recorded in ten years with the exception of 2000, when the tax reform and the family package pushed consumption growth in real terms up to almost 4 percent. On the whole, BA-CA expects the stronger domestic demand to generate half a percent more than in 2006. "Thanks to strong exports and investments in recent years which have rejuvenated the labour market, consumption will be able to offset the poorer overall conditions in the global economy in 2007 to a certain extent, but not fully", concluded Stefan Bruckbauer.

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Enquiries: Bank Austria Creditanstalt Economics & Market Analysis
Stefan Bruckbauer, Tel: +43 (0)5 05 05 41951;
e-mail: stefan.bruckbauer@ba-ca.com