24You

The new online banking of Bank Austria.

BusinessNet

The online banking for companies.

olbImgAlt To the MegaCard GoGreen-youth account
MegaCard GoGreen-youth account. The free MegaCard GoGreen-youth account for everyone from 10 to 20 years, and receive a welcome gift. To the MegaCard GoGreen-youth account
14.03.2008

BA-CA Business Indicator:
Slowing growth, heightened risks, no recession

  • BA-CA business indicator reverses slide in February
  • Growing external risks dampen economic outlook
  • Inflation subdues consumption hopes

Rising from 2.8 to 2.9 in February, the business indicator of Bank Austria Creditanstalt (BA-CA) reversed its slide of recent months. There were two opposing trends lurking behind this modest upwards movement. On the one hand, the mood in domestic industry has darkened again and industrial sentiment at European level remains stubbornly at a two-year low. On the other hand, Austrian consumers are viewing their economic futures with somewhat more optimism now, thanks to the base figures of recent months being corrected significantly downwards.

"The gloomier industrial sentiment does not come as a surprise, since the general conditions for the Austrian economy have deteriorated again in recent weeks", explained BA-CA deputy chief economist Stefan Bruckbauer. The negative international trends will weigh down on the Austrian economy throughout the year. Within twelve months the EUR exchange rate has gained around 20 percent against the US dollar. This is putting the export industry under increasing pressure. Moreover, the persistently high prices of raw materials are turning the screw, particularly the price of oil, which at more than USD 100 per barrel now costs twice as much as one year ago. Economic expectations are also being dragged down by the weak economic outlooks for key partner countries of the Austrian economy, such as Germany and Italy, while the signs of a recession in the USA have finally grown, especially since the crisis on the financial markets seems to have the potential to cause further negative surprises.

All hopes on consumption
The progress of economic activity in Austria will largely be determined by just how sustainable the current recovery in consumer sentiment proves to be and how strongly the somewhat brighter mood will be reflected in spending behaviour going forward, believe the BA-CA economists. "In light of the negative signals stemming from the international economy it is particularly important for private consumption to bolster economic activity in the current year, in order to limit the slowdown that is rooted in external factors", said BA-CA economist Walter Pudschedl. Following the weak gain of only 1.4 percent last year, the improving conditions on the labour market – where employment is up and the jobless rate remained below the previous year's levels in the early months of 2008 – advocate a recovery in private consumption this year. This coincides with brighter sentiment in the retail sector, where both assessments of the current state of business and expectations going forward improved in February.

Inflation slowing growth
However, as a sign of a pending revival in private consumption, the current increase in consumer sentiment should be treated with caution. The euphoric mood of consumers throughout the whole of last year did not ultimately lead to quicker consumption growth. What is more, the high inflation of recent months will put the brakes on an acceleration of consumption growth. "Sitting at above 3 percent, inflation currently exceeds the recent increases in wages and pensions, thus leading to a loss of purchasing power", revealed Pudschedl. Inflationary pressure is being strengthened further by developments on the raw material markets as well as possible knock-on effects from the higher energy prices. Since price growth is thus likely to remain high over the coming months, easing only in the second half of the year, the economists at BA-CA have raised their annual average inflation forecast for 2008 from 2.5 to 2.7 percent.

The high inflation could prove to be an increasing drag on growth in the current year, since private consumption will take time to get up to speed and will therefore only stimulate economic activity late on in the year and to a moderate extent. By turning upwards slightly the current BA-CA business indicator demonstrates that the Austrian economy remains on its growth path, in spite of the difficult conditions overall. "Notwithstanding the far higher risks to economic activity we uphold our growth forecast for 2008 at 1.9 percent", said Bruckbauer, going on to say that: "At present we see no recession looming on the horizon for Europe and Austria."

 charts

Enquiries: Bank Austria Creditanstalt Economics Department and Market Analysis
Walter Pudschedl, Tel. +43 (0) 50505 - 41957
e-mail: walter.pudschedl@ba-ca.com