BA-CA Business Indicator: Economic growth this year stronger than expected, loss of momentum for 2008 confirmed
- Sentiment in Austria and abroad weakens somewhat
- Consumption will increase again, although only slightly
- Expectation of rising inflation confirmed
- Turbulence in the financial markets has only a minor impact in Austria
In July the business indicator of Bank Austria Creditanstalt (BA-CA) fell from its record high of 4.9 to 4.7. “All the partial indicators of our business indicator declined in July,” says Marianne Kager, chief economist at BA-CA.
However, by historic standards the overall business indicator remains very high at 4.7. The same is also true of the partial indicators. “While industrial and consumer sentiment deteriorated slightly in July, they continue to point to a fairly robust economic trend,” says Stefan Bruckbauer from BA-CA Group Economics.
After posting a very strong Q2, the Austrian economy is therefore unlikely to see a downturn in Q3. However, the development of the BA-CA business indicator does point to a slowdown in the pace of growth. According to BA-CA economists this is especially true of foreign demand, which has been falling for some time now. Even if the development on the financial markets has not yet had a discernable negative impact on industrial activity in Europe, industry in the euro zone is likely to lose a certain amount of momentum," Kager continues. This will be reflected in Austrian industrial exports and the decline in the very high level of export activity witnessed over the last two years will continue. In Q2 quarterly export growth fell to its lowest level in real terms since early 2005.
Consumption could pick up again, but remains subdued
As anticipated, consumer demand quickened in Q2, although given the positive economic situation it remains somewhat subdued. Retail activity and new car sales in particular remain weak. However, as this also depresses the volume of imports, it will mitigate the impact on overall economic growth.
According to BA-CA economists it is extremely difficult to predict the outlook for consumption in the second half of 2007. While consumer confidence has declined, it remains at a record level in historic terms. Willingness to save remains very high from a historic perspective, but at the same time willingness to make large purchases is also increasing. Consumers say they intend to save slightly less in the next twelve months and will be more willing to make large purchases. Economists therefore expect that additional income available to consumers because of the healthy economy will boost consumption slightly. “Where the inclination to save is still very strong but weakening slightly, willingness to consume increases somewhat,” says Bruckbauer. BA-CA economists are therefore predicting that consumption in the second of half of the year will pick up slightly, although due to the anticipated higher price increases, the pace of this growth is likely to be modest. BA-CA economists predict that inflation in the second half of 2007 will remain at approximately 2.4 percent, rising to 2.6 in early 2008.
Overall, the slightly higher than anticipated growth rate in Austria of 1 percent in Q2 (on the previous quarter) means that the Austrian economy will grow somewhat faster this year than previously expected. “We have revised our forecast for 2007 upward from 3.1 percent to 3.3 percent,” says Kager. At the same time, the BA-CA economists assume that quarterly growth will weaken slightly to 0.6 percent in Q3 and 0.7 percent in Q4.
“The decline in trend indicators and the global economic situation confirm our cautious assumption that growth in 2008 will remain unchanged at 2.3 percent," Bruckbauer says. According to the BA-CA economists the current turbulence in the financial markets is not currently leaving any discernable skid marks in Austria’s economic development. In their opinion it is unlikely to have a direct effect in Austria itself. However, owing to the country’s strong export orientation Austria is highly dependent on the global economy, exposing it to a higher risk in this respect. One percent less growth in the USA shaves 0.3 percentage points off economic growth in Austria, as does half a percent less in the euro zone. Lower interest rates and a weaker euro would have a moderately positive effect, but would not offset the negative impact.