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13.11.2008

Bank Austria Business Indicator:
Economy in hibernation – recession in H1 2009

  • Bank Austria Business Indicator falls to record low in October
  • Economic activity faltering – but 2008 GDP growth still 1.9 percent
  • Export sector facing lengthy difficulties, consumer demand suffers under weakening labour market
  • Economy to bottom out in H1 2009, total growth in 2009 only 0.4 percent

The Bank Austria Business Indicator fell to a historical low of only 0.2 points in October from 1.4 in the previous month. The mood in Austrian industry has therefore turned around in recent months at an unprecedented rate. All of the confidence indicators included in the final figure fell once again in October. While industry sentiment in both the most important partner trading countries as well as in domestic goods manufacturing fell to its lowest level since 2001, consumer confidence in Austria is also currently displaying its lowest reading for more than ten years. "In light of the escalation of the financial market crisis in October, the latest confidence indicators have driven the business indicator down to an excessive extent", explained deputy chief economist at Bank Austria Stefan Bruckbauer, who went on to say: "However, the figures clearly show that not only will the pace of the economic slowdown accelerate further in the coming months, the turning point still lies some way ahead."

In the third quarter of 2008 the downturn in growth was still bearable at an estimated 0.2 percent compared to the previous quarter and 1.9 percent year-on-year. Nevertheless, in the final quarter of 2008 the Austrian economy now seems to be fully exposed to the global slowdown in economic activity and is flirting with stagnation. "Thanks to the good start to the year, economic growth in 2008 will still amount to an impressive 1.9 percent", says Bruckbauer confidently.

Export sector feeling the heat
The rapid deterioration in international conditions is going to exert even more pressure on expectations of economic trends in the coming months. The export sector, which to date has been the main pillar of economic growth, is now facing some particularly testing times. Although price competitiveness is being bolstered by the marked correction in prices of raw materials as well as in the euro, this is more than compensated for by the decline in global demand. In contrast to earlier economic cycles almost every market is affected by the adverse developments. Even the growth markets of Eastern Europe, which are so crucial for Austria, will be generating significantly lower export demand, and this is why we should not expect any overly rapid change in the development of foreign demand. The economists at Bank Austria assume that the outlook for the export sector will remain gloomy until mid-2009 at the earliest, as indicated by the rapid shrinking of order books for exporting companies within the last few months. "In view of the global economic downturn the Austrian export industry, which drove the economy in recent years, will be experiencing a lean period for some time to come", explained Bank Austria economist Walter Pudschedl.

Sluggish private consumption
Yet in the foreseeable future we cannot expect the domestic economy to provide any impetus to economic activity either. In response to the adverse conditions, Austrian business-owners are already beginning to scale back their investment plans. However, since many companies are sitting nicely with ample liquidity after the business successes of previous years, any setback in investment activity should be limited. In spite of state assistance as well as measures to support the construction industry, investments are set to fall by 1.2 percent in real terms in 2009 according to the economists of Bank Austria. Despite the fiscal measures taken such as bringing forward parts of the income tax reform, not even private consumption will be able to fully counter the negative influences stemming from international economic trends, and it is set to continue posting modest growth rates. The turning point reached on the labour market with the marked increase in unemployment is also dampening prospects. The economists at Bank Austria expect to see roughly 20,000 more people out of a job in 2009 than this year, bringing the unemployment rate up from 5.8 percent to at least 6.2 percent in 2009. Given the gloomy consumer sentiment not even the relatively swift and sustained fall in the inflation rate below the 3 percent mark before the turn of the year will really stimulate consumption, which will rise in 2009 by a mere 1.3 percent. The dismal growth outlook in conjunction with the sustained correction in raw material prices has pushed inflation concerns into the background. Inflation will fall from an annual average of 3.3 percent in 2008 to only 2.1 percent next year, believes Pudschedl.

Slow recovery in H2 2009
According to the estimates of the economists at Bank Austria, economic activity will bottom out in the first half of 2009.  This may also involve a modest reduction in production output in the first two quarters, which means that under the current conditions we can expect a slight recession for Austria in the first half of 2009. The economy will get back onto its feet and start growing slowly again in the second half of 2009 thanks to the ECB already loosening its monetary strings, which will continue going forward, the support of state stimulus packages and finally as the situation on the financial markets stabilises. With downside risks still remaining very high, the economists at Bank Austria have scaled back their growth forecast for 2009 as a whole to 0.4 percent. Only in 2010 will the Austrian economy get back into its groove again and return towards, though not quite achieve, its growth potential, recording a rate of 1.5%. "Although Austria’s economy will probably grow more slowly in the next two years than it has done in any two-year period since 1955, we do not have to fear a deep recession or a depression," concluded Bruckbauer.

 tables (37 KB)

Enquiries: Bank Austria Economics & Market Analysis
Walter Pudschedl, Tel. 05 05 05 Ext. 41957;
e-mail: walter.pudschedl@unicreditgroup.at

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