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19.12.2007

BA-CA Business Indicator:
No further decline in economic sentiment

  • Austria's industry outperforms the eurozone, maintains its global market share
  • Export structure and adoption of euro protects Austria against weak dollar
  • Austria's bank customers still hardly affected by sub-prime crises
  • Growth decreases to 2.3 per cent, consumption expected to surprise on the upside in 2008

Bank Austria Creditanstalt's (BA-CA) business indicator slightly increased to 4.1 in November (4.0 in October). "The temporary halt in the slide in confidence confirms our expectations that the economic slowdown will not prove to be very significant in 2008," says Regina Prehofer, the head of corporate banking at BA-CA.

However, this does not change the fact that economic sentiment already passed its peak this summer. This came as no real surprise in light of the high level of growth in the last few years. Austria's industry in particular has offered a remarkable performance since the recession of 2003. At 24 per cent, growth in the sector was more than twice as much as the average of 11 per cent in the eurozone as a whole and was also higher than Germany's 21 per cent. A significant portion of this success came from exports, which increased by 40 per cent in the same time period. Exports increased by 35 per cent in the euro zone as a whole. "Austria's industry has profited significantly more from the latest export boom than most of the countries in the eurozone," says Prehofer.

Austria able to maintain its global market share
Since 2003, Austria's industry has just managed to maintain its global market share of 1.1 percent, while the eurozone's global market share has decreased by almost 2 per cent to 28 per cent in the same time period.  Austria's global market share of 1.1 per cent is even more impressive considering the fact that Austria represents just 0.1 per cent of the world’s population and 0.5 per cent of global production. "With just a tenth of a per cent of the world’s population and a share of 0.5 per cent in the global economy, Austria's industry has global market shares of over 5 per cent in some sectors," reports Prehofer.  Austria even has market shares of over 10 per cent in the non-alcoholic beverage and railway track sectors. Austria still has a considerable market share of 3 to 4 per cent in important sectors like engine building and special machine building.

Although the majority of exports go to neighbouring countries, Austrian industry also has a great deal of success exporting to faraway countries. As a result, Austria has been able to increase its market share in the U.S. and maintain its market share in the booming regions of Asia and the Middle East.  Austria has also increased its market share in the country that remains its most important trade partner, Germany. These successes are even more remarkable considering the strength of the euro, which is putting a strain on Austria’s exports, too. However, Austria's economy is better protected than other eurozone countries, at least against the direct effects of the weak dollar. "Although the euro has appreciated against the dollar by 18 per cent since 2005, the export-weighted exchange rate for Austria has only increased by 2.4 per cent," says Prehofer. Most other countries in the eurozone have had to deal with more substantial increases. BA-CA sees two reasons for this: one reason is the structure of Austria's foreign trade and the other is the fact that the exchange rate with some important export partners was fixed with the introduction of the euro in 1999. "In the mid-90s, when the dollar depreciated by an amount similar to that which we have seen over the last few years, Austria's industry had to cope with an increase of over 12 per cent in the export-weighted exchange rate," summarises Prehofer. Back then, the reason for this was the depreciation of other European currencies, especially the lira. However, the indirect effects of the weak dollar that affect the entire European market are also putting pressure on Austria.

BA-CA is optimistic regarding the direct effects of the sub-prime lending crisis on Austrian bank customers. "Austria's banks have not fully passed on the drastic increase in money market interest rates in the interest rates for loans. In fact, the growth rate for lending activity has accelerated in recent months, especially for corporate loans," says Prehofer. According to BA-CA, the sharp increase in the growth of deposits to 10 per cent is primarily due to higher interest rates and the investment shifts, but it is also a sign of the trust the public has in Austria's banks.

This will allow Austria's banks to help boost the growth of the Austrian economy again in 2008. This is particularly true for investments, even though investment growth will slow from the very high level of 5 per cent to about 3 per cent because of the overall cooling economic conditions. BA-CA does not expect a slump because of the extremely high capacity utilisation of 85 per cent.

Inflation will decrease after being fairly high at the start of the year, consumption will pick up
BA-CA's economists do not see clear skies for inflation just yet, but inflation should start to decrease considerably from April 2008.  "We expect energy prices to increase by 3.2 per cent after increasing by 2.7 per cent in 2007.  However, we expect inflation for food prices to decrease from 3.9 per cent to 2.9 per cent in 2008. As a result, the overall inflation rate for 2008 should be around 2 per cent, which is just under the 2.1 per cent inflation in 2007," says Marianne Kager, chief economist at BA-CA. According to BA-CA's economists, the labour market will develop positively again in 2008, but the employment growth will lose a bit of its momentum. It will decrease from 1.8 per cent in 2007 to 1 per cent in 2008. The decrease in the unemployment rate will be cut in half from 0.6 per cent in 2007 to 0.3 per cent in 2008. Nevertheless, unemployment will decrease to 5.9 per cent for the year, falling below 6 per cent for the first time since 2001.

Despite the fact that the retail sector continues to develop rather sluggishly, BA-CA's economists expect a marked improvement in private consumption in 2008. "Despite all of the disappointments in the last few years, we are optimistic about private consumption because of the positive situation on the labour market, the wage and pension negotiations and the falling inflation rate over the course of the year," says Kager. BA-CA's economists also anticipate the savings rate to decrease slightly. New investments in Austria will come in just under the level seen in recent years, reaching EUR 17 bn.

As a result, consumption will partially make up for the deteriorating international conditions, which will directly reduce economic growth by about 0.7 per cent.  BA-CA's economists project overall economic growth to be around 2.3 percent in 2008, after 3.3 per cent growth this year. However, risk will remain high in 2008 and will range from the possibility of a more significant slowdown in the U.S. as a result of the sub-prime lending crisis and a resulting slowdown in the eurozone to a strong appreciation of the euro against the dollar. But BA-CA does not see any real risk of recession even if conditions worsen considerably. "Even if growth falls to 0.7 per cent in the U.S. and 0.7 per cent in the eurozone and the euro appreciates to 1.60 against the dollar, Austria would probably still achieve economic growth of just over 1 per cent in 2008," says Marianne Kager.

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Enquiries: Bank Austria Creditanstalt Economics and Market Analysis
Stefan Bruckbauer, Tel. +43 (0) 50505 - 41951
e-mail: stefan.bruckbauer@ba-ca.com