Bank Austria Business Indicator:
Austria will cope with the crisis better, but still only 0.7 per cent growth in 2009
- Bank Austria Business Indicator unchanged in September
- Meagre GDP growth of 0.7 per cent in 2009, but no recession
- Global environment dampens investment and export hopes, consumption remains weak
- Inflation down to 2 per cent in 2009
In September, Bank Austria's Business Indicator stabilised at a low level of 1.3 although industrial sentiment has continued to deteriorate dramatically. Given the difficult international conditions, Austrian and especially European manufacturers feel much more pessimistic about the future outlook. This compares with a slight improvement of consumer confidence in September due to an easing of price pressures. "The stabilisation of the Bank Austria Business Indicator at a low level in September, influenced by the spread of the financial market crisis to continental Europe, is likely to be only temporary. The Indicator will probably continue to move downwards, at least in October, on account of the fragile industrial and consumer sentiment“, says Stefan Bruckbauer, Deputy Chief Economist of Bank Austria.
In the course of the next few months the Austrian economy will be further challenged by the rapid deterioration of the global economy. It is less the direct consequences of the financial market crisis such as the severe confidence crisis on the stock markets, liquidity worries or the tightening of lending standards which are responsible for the harsher environment. It is rather the openness and strong export orientation of Austria's real economy which make it increasingly susceptible to the adverse impact of the global economic slowdown combined with the after-effects of the still high euro rate. After GDP rose by an estimated 0.2 per cent in the third quarter of 2008 compared with the previous quarter, Bank Austria's economists believe that the economy will just stagnate longer than originally anticipated. Assuming that the situation soon calms down again following the international measures aimed at restoring confidence, also in Austria, the second half of 2009 will see a cautious recovery of the economy. "Due to the good start to the year, we still expect economic growth of 2 per cent for 2008 as a whole, but we have lowered our GDP forecast for 2009 to 0.7 per cent “, says Bruckbauer.
Sharp fall in investment activity, private consumption still without significant impetus
According to Bank Austria's economists, Austria's economic weakness is broadly based. Gross fixed capital formation will even develop negatively in 2009 in face of the unfavourable global outlook, which will make it a particularly challenging year especially for the country's export industry. Investments in plant and machinery will slump, while building investments are likely to be less severely affected thanks to support from the public sector. Many companies enjoy good liquidity after their economic achievements in the preceding years. The measures currently taken by the ECB to lower interest rates will dampen the costs of external funding. "With investments declining by 0.3 per cent, the slump in investment activity is therefore likely to remain within limits. We will again see moderate growth in the second half of 2009“ says Walter Pudschedl, economist at Bank Austria.
Private consumption, which has grown only very slowly over the past years despite buoyant economic growth, is also lacking impetus in the current environment. The decline in the growth of employment and the rise of the unemployment rate to 6.2 per cent (national criteria) will have an adverse impact, and the high uncertainty over the economic outlook will keep the savings ratio, which amounted to 11.7 per cent in 2007, at a high level. Bank Austria's economists nevertheless expect consumption to grow at a moderate pace in 2009; the decline in inflation and fiscal measures should provide a slight impetus.
Spectre of inflation again banished
The economic downturn also has a good side. Inflation, which climbed to almost 4 per cent in the summer, will in the next few months fall more rapidly than expected. The global concerns over the economic situation are leading to a sharp correction of food and commodity prices. Inflation will decline to around 2 per cent towards the end of 2008. Despite price adjustments to many products whose costs have been affected by the sharp price rises of the last few months in areas such as gas, electricity and rent, inflation in 2009 will be well below the levels seen in 2008. Pudschedl summarises Bank Austria's current inflationary forecast: "We have slightly lowered our inflationary forecast for 2008 to 3.3 per cent and have sharply revised downwards our forecast for 2009 to 2 per cent.
Austria is not threatened by a recession as the indebtedness of households and companies has not risen
Bank Austria's economists do not expect Austria to slide into recession despite the more difficult conditions and the dramatic developments on global financial markets. In the last five years, the growth of retail loans has more or less matched income growth. Indeed, the ratio of retail loans to incomes has fallen and the net assets held by the Austrian population, i.e. assets less debt, has in the last five years risen by 60 billion euros or about 30 per cent. But the debt of Austrian companies has not risen in the last five years either. The ratio of external financing to GDP has remained constant. The bulk of external funding, about 80 per cent (without equity financing), is moreover provided by Austria's banking sector. This development in a time of financial crisis is also viewed favourably by the IMF. "Austria has not created any imbalances over the last few years and our growth was not built on a sharp rise in debt. For this reason we do not expect Austria to slip into recession" Bruckbauer concludes.