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Bank Austria Business Indicator:
Growing indications of shorter and shallower economic recession

  • Bank Austria Business Indicator slightly weaker in May
  • International headwinds already decelerating growth
  • Inflation to prevent stimulus from consumption at least until the end of the year
  • Increasing chances of economic improvement over the course of next year

Bank Austria's Business Indicator experienced a slight fall again in May. The decrease to 2.5 in April was followed in May with a fall to 2.4, making it clear that after the strong start to the current year the Austrian economy is now facing increasingly powerful headwinds. The individual components of the indicator's value have declined across the board. While the sentiment in the European industrial sector remains low, Austrian industrial companies have suffered a major loss of optimism and are looking to the immediate future with concern. Austrian consumers are also much less confident. The Austrian economy defied adverse international conditions for an unexpectedly long amount of time, but after a bit of a delay, the economic downturn set in early in the year. "After the increase in GDP of 0.7 per cent at the beginning of the year, growth will most likely decrease by half in the second quarter and will be even weaker during the second half of the year. Thanks to the strong start to the year, we are still expecting the economy to grow by a considerable 2.3 per cent for 2008 as a whole," says Bank Austria's deputy chief economist Stefan Bruckbauer.

Harsh international headwinds
International conditions, in particular the high relative value of the euro, are placing an increasingly heavy burden on the Austrian economy. Export growth has already begun to decline. As a result of shrinking business activity in key markets, Austrian foreign trade is not receiving the support it needs. "Decreasing foreign demand is currently clipping the wings that have guaranteed the high speed of the Austrian economy's growth up to now," says Walter Pudschedl, an economist at Bank Austria.

A lack of support from private consumption
The economy is also not receiving any fresh stimulus from the domestic economy. Despite fairly substantial increases in salaries and pensions and positive labour market data, private consumption is not gaining momentum. The culprit is persistently high inflation caused by food and crude oil prices, which are proving to be particularly obstinate in driving up prices. There are increasing indications that the persistently high commodity prices are also causing an increase in other dependent prices. In the face of international conditions, we can hardly expect a decrease in inflationary pressure over the next few months and Bank Austria's economists assume that the period of strong inflation over the 3 per cent mark will last late into autumn. Around the end of 2008, the high basis from the previous year will definitely contribute to a downturn, leading us to expect inflation rates of roughly 2 per cent again. Only a drastic alleviation of inflationary pressure will offer a chance for private consumption to recover. "At the turn of the year 2008/2009, private consumption will profit from improved sentiment thanks to favourable inflationary data," says Pudschedl, expressing cautious optimism.

Economic climate to improve over the course of 2009
Because it is difficult to foresee the development of international conditions, no reliable estimates can be made of the depth and duration of the economic recession in which the Austrian economy has now fallen. "In our opinion, the past few weeks have provided stronger indications that the delayed slump in the economy could be weaker and briefer than we expected at the beginning of the year," says Bruckbauer. The US real estate crisis and the turbulence on the financial markets have only had a very limited impact on the real economy in Europe up to now. The increased probability of a fairly rapid recovery of the US economy could at least contribute to stabilising the euro/US dollar exchange rate and could therefore strengthen global conditions. Under these conditions, Austrian exports would not suffer a recession, but, with the slow-down that has already begun, would start to grow again and would make a key contribution to economic improvement during the course of 2009. "After a sluggish summer and a week autumn, international conditions will improve during the winter to such a degree that over the course of next year the Austrian economy will grow back its wings," says Bruckbauer, adding: "The sluggishness of the economy at the beginning of the year will, however, keep GDP growth in 2009 under the 2 per cent mark." The development of commodity prices, in particular of crude oil prices, will remain a decisively high economic risk. In contrast, the strong focus of export companies on the dynamic Eastern European markets is an additional advantage that will allow Austria to maintain its lead in terms of growth in comparison to the EU average even during this difficult economic phase.


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

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