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16.07.2008

Bank Austria Business Indicator:
Austria's economy on the brink of stagnation

  • Sharp fall in the Bank Austria Business Indicator in June
  • Marked deterioration in framework conditions abroad
  • For the moment scarcely any domestic stimulus to growth in evidence
  • Economic growth will fall to 1.2 per cent in 2009

Following a period of stabilisation at the beginning of the year and a moderate downward trend subsequently, Bank Austria's Business Indicator has now fallen sharply in June. The decrease from 2.4 in the previous month to a figure of only 1.7 represents the sharpest monthly fall in the indicator for more than 5 years. All the individual components are responsible for the slide to the lowest figure since spring 2003. In particular, consumer confidence in a positive economic outlook has weakened considerably. However, sentiment among Austrian industrial companies has also deteriorated and the European industrial sector, previously led by rapidly expanding German companies, has now lost confidence. "The sharp fall in Bank Austria's Business Indicator in June as a consequence of the marked slowdown in the economic climate indicates that recovery will not be all that rapid", says Bank Austria's deputy chief economist Stefan Bruckbauer and adds, "the Austrian economy is coming under increasing pressure and is even hovering on the brink of stagnation in the second half of 2008."

A deteriorating environment is putting pressure on companies
Several factors are responsible for growing concerns about the economy among Bank Austria's economists. Most notably, the global framework conditions for the Austrian economy have deteriorated once more in recent weeks. The strong euro and high commodity prices, particularly for oil, are continuing to squeeze the economic environment. In addition, the US real estate crisis and its consequences are not yet over. Even if there was no increase in the cost of corporate credit in Austria from December last year to May and credit growth even accelerated, bad news from the USA and its consequences are still putting strain on global financial markets. Together with tighter monetary policy, this will make financing conditions for companies in Europe more difficult. In combination with the economic slowdown in a number of major European economies and, in particular, the negative signs emerging from the German industrial sector, Austria's largest trading partner, the growth trend for the Austrian economy is clearly pointing downwards.

Economic growth, which was surprisingly positive in the first quarter of 2008, at 0.7 per cent, has already halved in the second quarter. "In the second half of 2008, the unfavourable economic conditions will buffet Austria's economy even more strongly, meaning that only barely positive growth rates are to be expected. However, an outright recession remains unlikely", says Bruckbauer despite the large number of increasing risks.

Inflation will limit consumption in 2009 too
The Austrian economy cannot offset the unfavourable international conditions at the moment. In addition to investment, consumption will also increase very slowly in the coming months. High inflation is rendering nominal increases in salaries worthless and is continuing to depress consumption. "Given that the oil price continues to soar and the easing in the price of foodstuffs is only proceeding sluggishly, inflationary pressure is not going to ease until towards the end of 2008. We are therefore expecting inflation to average 3.4 per cent over 2008", says Walter Pudschedl, an economist at Bank Austria. Price increases for products that are dependent on these two factors will also keep inflation at just above the 3 per cent level into 2009 and this means that consumption will not be able to stimulate growth in the Austrian economy to any greater degree next year either. The economists at Bank Austria are also expecting an inflation rate that is well up on the European Central Bank's target, at 2.7 per cent, in 2009.

Tougher times on the labour market
The current splendid data on the labour market will soon be a thing of the past. Because of the economic slowdown, the next few months will see a trend reversal in which both the rise in the number of employees and the fall in unemployment will slow. "As a follower rather than a setter of economic trends, labour market reaction is delayed but the unemployment rate will reach 6 per cent again in 2009", says Pudschedl.

A marked weakening in growth in 2009
The wide range of existing risks makes it unlikely that we shall get through this economic blip very rapidly. "The combination of high commodity costs, a strong euro and a lack of demand means that impetus for growth cannot be expected either from abroad or at home before the end of 2008/beginning of 2009", says Bruckbauer. Following an increase in GDP of 2.3 per cent in the current year, the economists at Bank Austria are only expecting economic growth of 1.2 per cent for 2009. In addition, the downside risks are considerable in view of the unfavourable global framework conditions. If the price of crude continues to soar and the financial markets crisis evolves into a credit crunch, economic growth in Austria could even come to a grinding halt.

 charts (PDF; 49 KB)

Enquiries: Bank Austria Economics & Market Analysis
Walter Pudschedl, Tel. +43 (0) 50505 - 41957
E-mail: Walter.Pudschedl@UniCreditGroup.at

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