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18.08.2008

Bank Austria Business Indicator:
The downward trend continues

  • Bank Austria Business Indicator falls to a five-year low in July
  • Increased risk of stagnation in the second half of the year
  • Economic low expected around the turn of the year 2008/2009 – risk of recession slightly higher
  • Economic growth to fall to 1.2 per cent in 2009

Following the strong start to the current year, the domestic economy has been steadily losing momentum. Following an increase of 0.6 per cent qoq (2.7 per cent yoy) in the first quarter, the loss of momentum was kept at a minimum in the subsequent quarter with a GDP increase of 0.4 per cent qoq (2 per cent yoy). According to Bank Austria's economists, however, the pace of growth will decrease much more substantially in the coming months. The current Bank Austria Business Indicator fell from 1.7 to 1.4 in July, thus giving a clear indication of the direction in which things will develop in the future. "The decrease in the Bank Austria Business Indicator to a five-year low in July is a signal that the Austrian economy will once again shift into a lower gear over the next few months," says Stefan Bruckbauer, Bank Austria's deputy chief economist, adding, "In the second half of the year, quarter-on-quarter growth rates will be just slightly above zero. Thanks to the good start to the year, we expect to see a 2.0 per cent increase in GDP for 2008 as a whole."

The continuing slide in the Business Indicator in July can primarily be attributed to the deteriorating confidence in industry. Sentiment in both Austrian and other European industrial companies has fallen to the lowest level in about three years. The industrial conditions in Europe have worsened on a wide scale, whereby the German and Italian industrial sectors, which have a significant influence on Austrian exports, stand out as particularly negative. Sentiment has also continued to worsen among domestic consumers. "Economic sentiment has reached a long-time low. The risk is increasing that the Austrian economy will only manage to idle through the second half of 2008," says Bruckbauer.

Inflation as a problem child
Decreasing consumer confidence indicates that private consumption will not become a driver of economic development going forward. High inflation continues to spoil any hopes of a recovery in consumer demand, despite signs that inflationary pressure will ease in the near future. At 3.8 per cent yoy, inflation was slightly lower in July than in June and has apparently passed its peak for the year. Driven by the international economic slowdown, the rapid price growth experienced in the last few months seems to have slowed at least temporarily, although the anticipated easing of food prices is moving along very slowly and the sustainability of the decrease in oil prices seen in recent weeks is questionable. Because we are now much more likely to see price adjustments for product groups in which the cost of production is affected by the previous price increases in the food and commodities sectors, inflation will only gradually decrease in the coming months. "Following an average of 3.4 per cent in the current year, we expect to see annual inflation of 2.7 per cent in 2009, which will continue to hinder consumption," says Bank Austria economist Walter Pudschedl.

In addition, the labour market, which up until now has been extremely strong with favourable data, is starting to show signs of a reversal. The effects of the commencing economic deterioration can already be seen. The pace of the increase in employment is starting to decelerate and the number of unemployed people is decreasing more slowly. "We expect an increase in unemployment again in 2009. This will weaken domestic consumption and also dampen growth prospects," says Pudschedl.

The economy will sputter through the turn of the year and beyond
The growth prospects for the domestic economy are primarily being limited by international economic conditions, which have once again deteriorated in recent weeks according to Bank Austria's economists. The effects of the US real estate crisis are far from over. Growth prospects for the US are worsening and in light of the most recent economic data for some countries, particularly Germany, the vague hope of a separation of European economic performance from that of the US has vanished into thin air. These unfavourable international conditions will put even more pressure on the Austrian economy in the next few months, driving it to the verge of stagnation. Despite the multitude of risks, the chances are good that the Austrian economy will make it through the economic low around the turn of the year 2008/2009 without falling into a recession. "Due to the noticeable lack of stimulus from both international and national sources, the Austrian economy will grow slowly next year. We expect economic growth of just 1.2 per cent in 2009, the lowest level since 2003," says Bruckbauer.

 charts (PDF; 74 KB)

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

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