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BA-CA Economic Indicator: Dip in consumption should be overcome

  • Economic indicator reaches yet another record high
  • Indicator rises more rapidly than euro area average, despite lull in consumption
  • Growth to remain above potential in rest of year

In May the economic indicator of Bank Austria Creditanstalt (BA-CA) rose to 4.7, its highest level since 1990. "Industry sentiment has brightened again somewhat. Coupled with the improvement in consumer sentiment this has led to a further increase in the economic indicator", said Marianne Kager, chief economist at BA-CA.

The modest correction in the decline in industrial sentiment from April and the renewed increase in consumer sentiment were therefore stronger than the fall in industrial sentiment in the euro area. In spite of the more buoyant consumer sentiment in Austria, however, private consumption disappointed overall in the first quarter. Although retail sales developed positively, the growth in overall consumption in the first quarter fell short of the average increase recorded over the last three years. While part of this can be attributed to the lower use of energy due in turn to the milder weather conditions, one would have expected far stronger growth in consumption demand given the level of the economic indicators.

Employment in Austria swelled more quickly during the first quarter than for many years, while disposable incomes are likely to have grown just as strongly in 2006 as they did in 2000, both in real as in nominal terms. "Despite the prevailing optimism about the future and the good labour market and income developments, Austrians are saving more than they have done for over ten years, with the savings rate topping 10 percent", revealed Stefan Bruckbauer from BA-CA. Nevertheless, the initial estimates for April and May do not signal any dynamic growth in private demand, which is also corroborated by the weak car sales. At the same time, posting a rate of over 5 percent deposits are growing somewhat more rapidly than at the turn of the millennium, when Austria went through three years of flat growth and the expansion of household loans weakened.

Yet on the whole, the economists at BA-CA believe that consumer behaviour over the last few years in Austria is not really out of the ordinary; only in the last two quarters have developments diverged somewhat from the norm. While employment growth has remained above 2 percent, the annual growth rate of consumption fell from 2 percent (real) in the third quarter of 2006 to 1.2 percent in the first quarter of 2007. This has gone hand in hand with a rise in the savings rate. In spite of this somewhat surprising slowdown in consumption in early 2007, it has still remained above the average level recorded in the euro area, just like in the last two years. Only Spain, France, Finland, Ireland and Greece have seen consumption expand more powerfully in the last two years than in Austria. With the exception of France, these countries have also been able to post more robust growth in employment than Austria.

"The development over the last few years and the situations around the world lead us to conclude that consumption in Austria is well in step with employment dynamics and the short-term weakness in private consumption can be overcome, thus putting economic activity once again on a more broader footing", explained Marianne Kager. The economists at BA-CA assume, therefore, that this "consumption bottleneck" will ease over the coming months and private consumption will again pick up pace. This is indeed necessary, say the economists, since economic activity abroad is set to lose momentum as the year progresses. This is backed up by various indicators, such as industrial sentiment in the euro area, as well as industrial output figures in many countries of the single currency zone, which have recently been disappointing.

Growth to remain above potential in next three quarters
With domestic demand now growing at a more modest rate and foreign economic activity remaining vibrant for the time being, growth over the coming months should remain above potential according to the BA-CA specialists, falling only marginally below the first quarter. This confirms the expectation of overall growth for 2007 at just above 3 percent.

In 2008 the BA-CA economists assume that the good overall conditions of recent years, not least the labour market and incomes, will ensure private demand remains buoyant. Investments, on the other hand, will again fall away somewhat, and export demand is likely to be weaker, which will be attributable to a modest cool-down in the euro area. "With economic activity in Austria remaining healthy the slowing foreign demand in 2008 will bring domestic growth down to 2.3 percent. This figure still lies above the potential of the economy, while the risk of a more substantial slowdown remains slim", said Bruckbauer.


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