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Bank Austria Business Indicator:
The downturn continues

  • Bank Austria Business Indicator slides further into the red in March
  • Turnaround not expected until some time in 2010
  • Massive falls in export-oriented industries, construction holding up relatively well
  • Dismay caused by the crisis will also increase in service sectors during the year
  • Inflation will slow sharply in 2009 and will remain low in 2010
  • Prospects for growth only moderate even after the crisis

"Following a short-lived break in the previous month, the slide in the Bank Austria Business Indicator continued in March. With the fall to -2.2, the indicator has reached the lowest level since the survey started 20 years ago", says Stefan Bruckbauer, deputy chief economist at Bank Austria. The downward trend also remains broadly based. All the components included in the calculation are trending downwards. In particular, the international environment has suffered a further substantial deterioration. Sentiment in European industry has hit a new low. The indicator of confidence weighted with Austria's exports has fallen more sharply than the unweighted average for the euro zone. This indicates that Austrian industry's most important sales markets are, apparently, more seriously affected by the weakness in global demand and are faced with particularly poor prospects. As the decline in the latest Bank Austria Purchase Managers' Index in March suggested, sentiment among domestic manufacturers has already deteriorated further in view of the precipitous drop in new orders and shrinking orders in hand from foreign customers. The deterioration in business expectations is, however, not only attributable to the problems with exports but increasingly to less favourable prospects for domestic demand. Austrian consumer confidence weakened further in March, reaching a historic low. "The current Bank Austria Business Indicator shows that the Austrian economy is suffering a prolonged, sharp recession and, at the moment, there is no sign when it will bottom out. Domestic industry will therefore not reach its turning point before 2010", is how Bruckbauer interprets the current figures.

The collapse in the global economy is having an ever greater impact on the export-oriented domestic industry. The latest data clearly illustrate that exports will fall massively in the course of the year, as will equipment expenditure in reaction to shrinking demand. Economists at Bank Austria are assuming a reduction of at least 6 per cent in real terms in both cases for 2009. In the absence of any indicators of a turnaround to date, a fall in investment is also expected next year and exports will stagnate at best. The repercussions of the weakness in international demand will differ significantly from industry to industry. "While the automotive industry and its suppliers will be faced with enormous challenges over the next two years, sectors that are more closely linked to domestic demand, such as the electrical industry, will fare far better", says Bank Austria economist Walter Pudschedl. As early as 2008, automotive production in Austria suffered heavy losses, which will increase considerably in the current year. A decline in production of more than a fifth cannot be ruled out and the downturn will only stop in the course of 2010. The mechanical engineering, steel and metal goods production sectors, which are major automotive suppliers in some cases, expect massive falls in demand throughout 2009. According to estimates by Bank Austria economists, a recovery next year is currently uncertain if anything. By contrast, other sectors, such as the electrical industry, will benefit from government measures to boost the economy and will therefore only suffer a relatively moderate fall in production in 2009. They will also start to recover more rapidly in 2010.

Domestic demand is being buffeted by an increasing headwind, as the collapse in the economy continues and intensifies, which is reinforcing the downward trend. As a result, construction will shrink in both 2009 and 2010. In certain areas, such as the renovation of tower blocks and civil engineering, however, slight growth is possible thanks to government stimulus packages in both years, which mean that the decline in construction of 3 per cent in the current year and 1 per cent in 2010 should still be relatively moderate by and large.

In the services sector, services that are closely linked to business, the wholesale trade and the transport industry will suffer most from the difficulties facing industry, and industry-oriented sectors, at least, will have to expect similarly substantial falls in sales as many industrial sectors. Tourism will also be disproportionately affected by the weakness in the global economy in 2009, since the reduction in overnight stays by high-spending tourists from further afield will only be partially offset by stronger domestic demand. While the retail sector will be boosted by the tax reform and additional transfer payments for families, the sharp rise in unemployment by some 100,000 in 2009/2010 and an increasing tendency to save will depress prospects and give grounds for expecting slightly falling sales.

Aided by slowing domestic demand – the marked fall in investment will be accompanied by stagnant private consumption - inflationary pressures will remain low. For the moment, there will not be any external factors driving prices either, which means that the fall in inflation, which started in autumn 2008, will continue over the next few months. In summer, slightly negative figures are even possible. "Inflation should fall to 0.4 per cent on average in 2009. The inflation rate will also remain low in 2010, at 1.1 per cent on average, unless external factors cause prices to move upwards", says Pudschedl.

The repercussions of the collapse in the global economy will impair Austrian economic growth this year and beyond and, in so doing, will affect all sectors. While government stimulus packages and the relaxation of monetary policy adopted to date are important countermeasures, which will cushion the serious consequences of the slump in global demand over the next few months, they will not be sufficient to change course permanently. Alternative measures, such as quantitative easing, through the purchase of securities by the ECB, could also be added to the agenda. "The dream of a brief economic slowdown, which can be ridden out painlessly, is finally over", concluded Bruckbauer and adds: "Following a fall of 2.2 per cent in GDP in 2009, the Austrian economy will not grow in 2010 either." Moreover, the prospects for growth will remain less than dazzling even once the current difficulties have been overcome and the financial markets have stabilised. Over the next few years, the public sector throughout the world will attempt to reverse the current fiscal expansion, will tighten its belt sharply and consequently curb economic growth. At the same time, rising savings ratios even in those countries, which previously ran substantial current account deficits, will also depress global demand significantly.

Austria is not threatened by bankruptcy
Finally, the Bank Austria economists draw attention to a current analysis entitled "Hat sich Österreich übernommen?" (Has Austria overextended itself?) (Report 1 2009). It shows that speculation that Austria could go bankrupt is totally exaggerated. "Even if the very pessimistic assumptions by the IMF of the costs of the banking packages are adopted, Austria's public sector debt remains well below average and is lower than that of Germany or France", analyses Bruckbauer. Bruckbauer also draws attention to the fact that a majority of Austrian banks' loans are not foreign loans but are local loans in Eastern Europe, which is overlooked by many superficial observers.

 charts (PDF; 14 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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