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17.12.2008

Bank Austria Business Indicator:
Confronting the recession

  • Bank Austria Business Indicator turns negative for the first time in November
  • Inflation falls sharply
  • Consumption stabilises in uncertain times
  • Economic programme moderates the downturn, but cannot prevent the recession in 2009
  • Economy contracts by ½ per cent in 2009, slow recovery in 2010

Sentiment in the Austrian economy continues to deteriorate. In November, the Bank Austria Business Indicator again reached a historic low and, at -0.7, moved into negative territory for the first time since its inception. Positive factors such as the fall in inflation, the announcement of wage and income tax reductions, and further financial support for 2009 are also unable to check the pessimism of consumers. In November, consumer confidence fell to its lowest level in more than ten years. At the same time, the expectations of Europe's and Austria's industry are diminishing, notwithstanding declining commodity prices and a weaker euro. "The sharp downturn in industry expectations and consumer sentiment are likely to exacerbate the slowdown in economic activity. The current development of the Bank Austria Business Indicator shows that the economic downturn in Austria will be more protracted than originally anticipated" says Stefan Bruckbauer, Deputy Chief Economist at Bank Austria.
The global economic slowdown is accelerating. The intensity of the downturn is particularly apparent in Austria's key markets. While the Austrian economy was able to defy the unfavourable global conditions until well into the current year, their negative impact can no longer be avoided. Based on current data, Bank Austria's economists expect the Austrian economy to weaken in the fourth quarter of 2008. "The stronger decline in economic activity towards the end of the year has prompted us to revise our forecast for Austria's economic growth for 2008 to 1.8 per cent" Bruckbauer explains.

Downward inflationary trend
The growing fears of an economic recession are currently linked to a very positive side-effect. Inflation is now falling more rapidly. In November, Austria's inflation eased to under 3 per cent for the first time this year. The inflation rate is consequently expected to average 3.3 per cent in 2008. The beginning of 2009 is likely to see some price adjustments, especially in the areas of rent and energy prices, as after-effects of the sharp rise in inflation. Walter Pudschedl, economist at Bank Austria, says "Following the marked fall in the oil price and other commodities, a moderate easing of food prices and moderate consumption, we expect inflation to ease significantly to 1.5 per cent in 2009“.

Consumption stabilises in uncertain times
The continued decline in inflation should help improve the negative consumer sentiment in the coming months and counteract any further increase in consumer restraint. The economic measures that were recently approved will also help in this respect. While consumption will be affected by the rise in unemployment as a result of the economic slowdown, and by the negative asset effects following the turbulence on financial markets, consumers will have an additional amount of about EUR 3.4 billion at their disposal in 2009 due to wage and income tax reductions and other financial support. Private consumption will therefore develop favourably in 2009, notwithstanding the current uncertain environment. "The conditions for private consumption to be a stabilising factor in an exceptionally difficult economic phase are good, as are the prospects that it will remain on its growth path in 2009 with real expansion of one per cent“ says Pudschedl.
The contraction in new orders and the thinning out of backlogs of work as a result of weaker demand for exports will in the next few months markedly curb investment activity. Bank Austria's economists expect investments in plant and machinery to contract by over 4 per cent in 2009. In view of the relatively favourable level of capacity utilisation in the construction industry, gross fixed capital formation will be down at 2.3 per cent.

Effective economic programme – economy will nevertheless shrink by ½ per cent in 2009
As the government's economic measures focus more on boosting private consumption, they cannot offset the negative trend in investments. Overall, Bank Austria's economists are assuming that although the initiatives taken to date to stimulate consumption and investment will result in a positive growth effect of about 1 per cent of GDP, Austria will not be spared a recession. The prospects for Austria's export industry have dimmed significantly following the dramatic deterioration of global conditions. The signs of a speedy economic recovery are moreover dwindling because if the slowdown experienced by industry becomes protracted, it will become increasingly difficult for the service sector to resist the negative pull. Bruckbauer summarises Bank Austria's forecast: "We have to expect a ½ per cent decline in economic growth in 2009, and the economy will remain weak in 2010 with growth of only 0.7 per cent“. Given the rapid slowdown of economic activity and the high uncertainty over the full implications of the financial market crisis for the real economy, the downside risk will remain. "This situation poses a big challenge for Europe's economic policy, especially monetary policy, to soften the downturn“, Bruckbauer concludes.

 charts (PDF; 56 KB)
 

Enquiries: Bank Austria Economics & Market Analysis
 Walter Pudschedl, tel. 05 05 05 ext. 41957;
 e-mail: walter.pudschedl@unicreditgroup.at