24You

The new online banking of Bank Austria.

BusinessNet

The online banking for companies.

olbImgAlt To the MegaCard GoGreen-youth account
MegaCard GoGreen-youth account. The free MegaCard GoGreen-youth account for everyone from 10 to 20 years, and receive a welcome gift. To the MegaCard GoGreen-youth account
13.07.2007

BA-CA Economic Indicator:
Modest consumption despite buoyant sentiment, but inflation spike round the corner

  • Economic indicator reaches yet another record high
  • Consumption barely stronger than in previous year
  • Inflation to rise visibly in H2; 2007 and 2008 inflation rate: 2.1 percent

In June the economic indicator of Bank Austria Creditanstalt (BA-CA) rose to 4.9, yet another record high. "The sentiment of consumers in Austria and abroad has pushed our economic indicator to a new high" said Marianne Kager, chief economist at BA-CA.

Yet in spite of the renewed improvement in consumer sentiment, the figures released so far reveal that private consumption remains subdued. Ever since the moderate increase in retail sales figures at the beginning of the year, sales levels in retail have stagnated in real terms. "ven though the positive mood of consumers and the still dynamic labour market may lay the foundations for a revival in consumption throughout the second six months of the year, consumption in 2007 will only grow marginally more strongly than in the past two years" said Stefan Bruckbauer. The economists at BA-CA assume that real consumption growth this year will total 2.2 percent after recording 2.1 percent in 2006 and 2.0 percent in 2005.
 
GDP in the second quarter is set to expand at a similar annual rate to the first quarter, according to the economists, but on a quarterly basis they expect growth to dip slightly. "The quarterly growth rates will fall to a certain extent: after posting a strong 3.6 percent in Q1 the rate likely in Q2 is 3 percent with a further decline on the cards for the remaining two quarters to roughly 2.5 percent", explained Kager, "This corresponds to an annual growth rate of 3.2 % for 2007."

Despite the positive development on the labour market and the encouraging consumer sentiment, there are obvious obstacles to a revival in consumption growth, believe the economists at BA-CA. One such factor is the persistently high savings rate, which is now coupled with increasing inflation.

Inflation rate to continue rising
Inflation surprised in Austria as early as May, when in contrast to the rest of the euro area it posted an increase. The reason for this higher rate of inflation in May was not the oil price but instead the costs of foods and living, both of which are quite evidently local developments since the average growth rates of these prices over the same period in the euro area declined. Throughout the second six months we will see a tangible rise in energy prices too, which together with the anticipated continuation in the growth of food prices and the rise in mineral oil tax – adding 0.2 percent to inflation say the BA-CA economists – will start to push inflation up again from the end of the summer.

"In the second half of 2007 we anticipate an increase in inflation in Austria to just over 2.5 percent, in spite of the higher euro exchange rate which will subdue the rate only marginally", explained Bruckbauer. Only in the second half of 2008 do the economists at BA-CA believe we will see inflation come down again. Thus the annual inflation forecast for both this year and next is 2.1 percent.

The economy in the euro area is also coming under pressure from the high euro exchange rate. "If the euro stays around 1.38 in the second six months of the year, which would result in an annual average of 1.36, in 2007 the strong euro could cost the economy 0.2 percent in growth", said Kager. According to the calculations of the BA-CA economists, a steady increase in the euro exchange rate against the dollar to 1.50 compared to the level recorded in 2006 (1.26) would cost 0.6 percent in growth, while a rate of 1.60 would result in 0.8 percent in lost growth. Although in 2006 Austria was able to use its lively export activity to regain the global market share it lost in 2005, which now sits again at 1 percent, the same does not apply for the other countries in the single currency zone.

The euro area lost another 0.2 percent in 2006, and since 2002 it has lost a total of 3.3 percent from its share of the world market. During the same period the value of the euro against the US dollar rose by one-third. Admittedly, the USA has also taken similarly large hits to its global market shares. "Even though the primary reason for the loss of market share by the euro area is the rising importance of other export countries, above all China, an overly rapid and strong increase in the euro rate could cost the euro area global market share, at least in the short term", stated Stefan Bruckbauer. This also has negative consequences for Austria, since a marked decline in the competitiveness of the euro area in the world would have medium-term repercussions for Austria too. Nevertheless, the BA-CA economists do not anticipate any additional strong gains for the euro against the dollar; what is more, the high euro rate also relieves pressure on import prices, thus reducing the adverse economic effects by roughly 50 percent.

According to the BA-CA economists the current developments confirm their forecast of slowing economic activity throughout the rest of the year, and consequently they expect growth to dip again next year to 2.3 percent.

 charts

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