BA-CA Business indicator:
Economy remains robust despite US downturn and strong euro
- US downturn undermines growth
- Domestic demand almost able to offset this in full
- Sharp fall in US dollar causes economic risks
The economic indicator of Bank Austria Creditanstalt (BA-CA) remained at a high level again in March at 4.4, down only marginally on its high in February of 4.5. “Austria’s economy was again robust in the first quarter and growth is likely to stand at over 3 percent year-on-year,” commented Marianne Kager, Chief Economist at BA-CA.
While sentiment in industry in Austria remained relatively constant in March, there was a small downturn in consumer sentiment. “Despite the slight fall in consumer sentiment in March, the level is still very high and we therefore expect the growth rate in private consumption to have risen,” added Stefan Bruckbauer of BA-CA.
As BA-CA is also expecting year-on-year growth in investments to have remained relatively strong in the first quarter with possible rates again of around 5 percent in real terms, the anticipated slight decline in exports will not curb the optimistic business sentiment.
All signs continue to indicate that Austria’s economy will again achieve very good growth of around 3 percent in 2007. This means that Austria will cope well with the slowdown in the US economy, although slower growth in the USA will adversely affect the Austrian economy by around 0.4 percentage points compared to 2006. Growth in the euro area and Eastern Europe is also slightly down on the very robust level of 2006 and this too will restrain expansion in Austria somewhat. At the same time, however, the expected acceleration in domestic demand resulting from the positive trend in industry and the labour market in Austria will partially offset these curbing effects. Overall, BA-CA believes that growth will therefore come in at around half a percentage point below the previous year.
In this scenario, economists at BA-CA assume that the current problems in the US real estate market will not lead to a recession in the USA. Even in the event of a sharper downturn in the US economy, the impact on Austria is unlikely to be strong enough to trigger a recession. “In general, weak consumption in the USA is not enough to send the global economy and with it Austria’s economy into a tailspin,” explained Marianne Kager.
According to the BA-CA economists, this moderate scenario is essentially contingent on a stable trend in the financial markets. Should the difficulties in the US economy adversely affect the financial market to a significant extent, then a considerably stronger impact would have to be expected for Europe and also Austria. The biggest risk, BA-CA believes, stems from the exchange rate. “If the dollar falls sharply to around 1.50 for example, tangible negative effects for Austria could no longer be ruled out, in this case of more than half a percentage point,” comments Stefan Bruckbauer. However, the BA-CA analysts do not expect the US dollar to fall to 1.50. If the dollar remains on average for the year at just over the 1.30 mark, as BA-CA currently anticipates, the negative impact will be limited to 0.2 percentage points. In an extreme scenario, with a slide in the U.S. dollar to 1.75, the negative effect on growth would increase to as much as 1.2 percentage points. Coupled with the negative repercussions for the global economy, a recession in Austria would indeed be conceivable. However, the economists at BA-CA currently consider this scenario to be unlikely.