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Bank Austria Business Indicator:
Austrian economy faces a hard winter

  • The Bank Austria Business Indicator fell for the sixth successive time in August
  • The decline in oil prices and a stronger dollar cannot entirely offset the further cooling of the global economy
  • Inflation is falling more rapidly, but consumption lacks momentum
  • The economic downturn will bottom out only around mid-2009

The Bank Austria Business Indicator continued its downward trend in August, falling from 1.5 to 1.3 points. The continued downturn is largely attributable to the weak international environment, which is dampening sentiment in Europe's industry. Confidence in a more favourable business climate in the months ahead slackened in August in all of Europe's major industrial nations, especially in Germany and Italy. These two countries account for almost 40 per cent of Austria's total exports of goods, making them Austria's most important trading partners. It is therefore not surprising that Austria's industry is more sceptical about the future outlook. Stefan Bruckbauer, deputy chief economist at Bank Austria, explains why the Business Indicator is not falling quite as fast as before: "In Austria, confidence within the industrial sector is weakening markedly, while consumer sentiment stabilised in August, even if this was at a low level".

The sixth successive decline represents the longest period in which the Business Indicator has been experiencing a downward trend since 2001. "While the fall of the Bank Austria Business Indicator eased somewhat in August, the downturn has persisted over the last few months, suggesting that the Austrian economy could face a stonier path than originally expected", Bruckbauer says.

Positive oil price and exchange rate developments offset
Until the spring of the current year, the impetus enjoyed by the Austrian economy largely came from abroad. Europe's key markets are now showing clear signs of faltering. The industrial sectors of some countries are about to slide into recession and the economic risks arising from the precarious situation in the international financial sector following the US sub-prime crisis have increased in the last few days. In view of recent developments, Bank Austria's economists believe that the external impetus to economic growth will in the next few months be even weaker than was assumed some weeks ago. The relief afforded by a more favourable exchange rate against the US dollar for the export sector and by the recent decline in oil prices will be only moderate. "The Austrian economy is benefiting from a stronger US dollar and the fall in the price of oil. These two factors cannot however really offset the dampening effect of the global economic downturn", says Bank Austria economist Walter Pudschedl.

Turnaround in inflation, but limited impact on consumption
The sharp decline in oil prices in the last few weeks has supported the recent turnaround in the inflation rate following a moderate easing of food prices. Bank Austria has therefore slightly revised downwards its forecast for inflation for 2008 to an average 3.3 per cent. While inflation will fall more rapidly in the course of the next few months if the current trend should continue on the commodities markets, it will decline only relatively slowly in general terms as we are likely to see more price adjustments for product groups which are affected by the previous price rises in the food and commodities sectors. Bank Austria's economists now expect inflation to average 2.5 per cent in 2009. As the slow decline in inflation will have little positive impact on the disposable income of private households, it will hardly stimulate consumption. "Consumption is unlikely to trigger an economic turnaround in 2009. The Austrian economy again hopes to receive an impetus from abroad", says Pudschedl.

Modest growth expectations for 2009
The impetus will however initially hardly be forthcoming. The Austrian economy will almost stagnate in the second half of the current year. In view of the good start to 2008, the growth forecast of 2 per cent for 2008 by Bank Austria's economists remains unchanged. For the Austrian economy, the repercussions from the deterioration of the global climate will probably be greater and last longer than originally expected. Given the recent developments on financial markets, the risks for the growth prospects reflect the gravity of the overall situation. "The Austrian economy will face difficult conditions this winter, and the downturn is only likely to bottom out towards the middle of 2009. The Austrian economy will grow by a moderate 1.2 per cent in 2009",  Bruckbauer maintains.

 charts (PDF; 74 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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