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Bank Austria Business Indicator:
Robust growth in the first half of the year, increased risks to growth going forward

  • Bank Austria Business Indicator falls slightly in March
  • Business activity to remain steady for now, but a recovery will prove more difficult
  • Slower decline in inflation dampening consumption outlook

After a slight increase in February, Bank Austria's Business Indicator was a bit weaker in March, decreasing from 2.9 to 2.8. The main factor behind this decrease was a deterioration in consumer sentiment. Since the start of the year, the values of the indicator have been fluctuating within a narrow margin below the level seen last year. "Although the current level of the Business Indicator's values suggests that we are experiencing a fairly substantial slowdown compared to the boom year 2007, the minimal movements seen in the first quarter clearly indicate that business activity has temporarily found solid ground at a satisfactory level," says Bank Austria's deputy chief economist Stefan Bruckbauer.

The domestic economy is apparently not being affected by the negative international conditions, which are characterised by high commodity prices, a strong euro and the turbulence on the financial markets. According to the estimates of Bank Austria's economists, economic growth, which is expected to come in at 0.5 per cent qoq and over 2.5 per cent yoy for the first three months of the year, is not likely to lose much momentum in the second quarter. "The Austrian economy will continue to expand significantly in the first half of 2008 and will achieve a growth rate of about 2.5 percent," says Bruckbauer.

Direct effects of the turbulence on the financial markets will only slightly hinder Austria's economy
However, Bank Austria's economists are less optimistic about the second half of the year and 2009, when they anticipate a more substantial economic slowdown. The US economy is likely to slide into a mild recession, which will put the brakes on economic growth in Europe and consequently in Austria over the rest of the year. Nevertheless, the worst of the crisis on the financial markets should be over by then, which will likely limit the effect that the problems caused by the US real estate crisis have on the real economy. "We believe that the direct risks for Austria's economy related to the turbulence on the financial markets are minimal," says Walter Pudschedl, an economist at Bank Austria.

Slower decline in inflation dampening consumption outlook, only slow recovery for world economy
However, there are already more dark clouds on the horizon for Austria's business activity. The high inflation rate of over 3 per cent over the first few months of the year is indirectly affecting growth expectations via the negative consumption outlook. Core inflation is expected to increase and there are growing indications that the secondary effects of inflation, which up until now had primarily been caused by external factors, are starting to set in. "We expect the period of high inflation with rates above 3 per cent to last for most of the second half of the year, if not longer," says Pudschedl. This extended period of high inflation is likely to dash hopes of a significant recovery in private consumption based on the supposedly high salary and pension agreements reached last year and the extremely positive conditions on the employment market with record employment and a decreasing unemployment rate. At 1.5 per cent, private consumption is not expected to contribute any more to economic growth in 2008 than it did last year.

While the negative external conditions are not likely to impact business activity as much in 2008 as previously assumed, we expect to see less stimulation from consumption. Overall these two factors will offset one another for the most part in 2008. However, due to continued restrained consumption and the delayed consequences of the slowdown of the world economy, there is very little chance of a quick escape from the expected economic slump and a recovery is likely to come next year at the earliest. "We still expect Austria to achieve economic growth of 1.9 per cent in 2008, but we have reduced our forecast for 2009 to 1.8 per cent," summarises Bruckbauer and adds, "A very slow recovery in the world economy combined with high commodity prices and the strength of the euro represent a considerable risk for Austria's economy."


Enquiries: Bank Austria Economics and Market Analysis
Stefan Bruckbauer, Tel. 05 05 05 ext. 41951
E-mail: stefan.bruckbauer@unicreditgroup.at