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21.01.2008

BA-CA Economic Indicator:
Growth in 2008 to dip below 2 percent

  • Growth falls in Q4 below 3 percent for first time in 2007
  • Industry and consumers treading cautiously
  • Economy to lose momentum in 2008 under difficult international conditions
  • Inflation dashes hopes of consumption-driven support

The economic indicator of Bank Austria Creditanstalt (BA-CA) fell from 4.0 percent to 3.7 percent in December. Consequently, the lowest figure in 2007 was posted at the end of the year, and therefore the more sombre mood that set in around the summer continued to darken both among consumers and in industry at year-end. The economists at BA-CA believe that this development will have implications for economic activity in Austria. "In the final straight, economic growth in 2007 fell below the three-percent mark for the first time", revealed Stefan Bruckbauer, Deputy Chief Accountant at BA-CA, who went on to say that: "The expansion of 2.9 percent in the fourth quarter constitutes an impressive end to what was an extremely successful year for Austria." This is because with estimated GDP growth in the region of 3.3 percent over the year, the Austrian economy has managed to maintain its lively momentum from 2006, despite the international malaise caused by the high prices of oil and the weak US dollar. The growth advantage enjoyed by the country over both the Eurozone and the USA was even increased.

Nevertheless, economic activity will continue to slow in 2008 before firming up in the second half of the year. "The marked deterioration in global market conditions coupled with the stronger than expected increase in inflation have prompted us to revise downward our projections for 2008 to below the 2 percent mark, more precisely to 1.9 percent", said Bruckbauer.

Strong inflation dampens consumer appetite
The growing uncertainties in connection with the US housing crisis are increasing the risks to the economy, while other international factors are not helping either. The open Austrian economy is therefore confronted with some difficult conditions that will also be reflected in the performance of the export sector in 2008. "Exports will no longer be the driving force behind economic activity in Austria during 2008, but they will still play an important role", explained BA-CA economist Walter Pudschedl. The weak economic trends in the important consumer countries of the Eurozone are dampening prospects. Nonetheless, Austria will still benefit from the robust expansion on the growth markets of Central Europe, since one-fifth of Austrian exports already flow into Eastern Europe.

In spite of the tangible increases in pensions and wages as well as the progress made on the labour market, private consumption will not fulfil the hopes of the BA-CA economists that it will provide more robust support to the economy in 2008. These hopes have been dashed by the surprisingly strong inflation. After the powerful surge in inflation towards the end of 2007 there would appear to be no respite on the horizon for prices in the first few months of this year. "Inflation will stubbornly remain above the three-percent mark until the early summer, and this will subdue consumer spending", said Pudschedl. In the second half of the year, however, inflation is expected to taper off as growth in food prices slows, provided that the price of oil behaves. Despite this, annual average inflation is likely to rise from 2.2 percent in 2006 to 2.5 percent.

Albeit weakened somewhat, the Austrian economy is forging ahead on its growth trajectory, and this will continue to benefit the labour market as well. A rise in employment and a further decline in the jobless rate to below 6 percent (Austrian methodology) make it clear that despite the growing risk factors the Austrian economy will not slip into a recession.

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Enquiries: Bank Austria Creditanstalt  Economics Department and Market Analysis
Stefan Bruckbauer, Tel. 05 05 05 Ext 41951
E-mail: stefan.bruckbauer@ba-ca.com