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Bank Austria Business Indicator: Recovery has started, but the economy will remain below pre-crisis levels until 2012

  • Bank Austria Business Indicator improves again in August
  • Strong recovery in the second half of the year, 1.1 per cent growth expected in 2010
  • Recovery with high risk of setbacks
  • Reversal in consumer price trend still to come

The Austrian economy has started to emerge from the economic crisis and is enjoying a strong tailwind at the moment. This is evident from Bank Austria’s Business Indicator, which has been rising steadily since bottoming out in April. “Bank Austria’s Business Indicator improved from minus 1.8 to minus 0.9 in August – the strongest increase since calculations began nearly 20 years ago,” says Helmut Bernkopf, Bank Austria’s head of Corporate & Investment Banking.

All of the components of Bank Austria’s Business Indicator pointed up in August. The sentiment among Austrian consumers has brightened considerably. The effects of the tax reform as a pillar of the government stimulus package and strong consumer price disinflation resulting from the correction in commodity prices have been felt. The announcement that some companies will phase out reduced working hours in the coming weeks has also helped to boost consumer confidence, but the unfavourable conditions on the labour market continue to put a strain on sentiment in general.
Domestic industry also offered significantly more encouraging results in August. More domestic and foreign orders have improved business expectations, which had remained very pessimistic up to now. The Austrian industrial companies are following in the footsteps of European industry in this regard. In the Eurozone, which accounts for well over 50 per cent of demand for Austrian products, industry confidence has risen in nearly all of the member countries. In particular, German industry, which plays an especially important role in the Austrian domestic economy, is looking to the future with more optimism again. “Examining the decisive upward trend among the individual components of Bank Austria’s Business Indicator, it becomes clear that after the economic stabilisation in the summer, signs point to a surprisingly strong upward trend in the coming months. We anticipate that the Austrian economy will enjoy robust growth in the second half of 2009,” says Stefan Bruckbauer.

Recovery between surprise effect and risk of setbacks
According to Bank Austria’s economists, the recovery will continue into 2010. With the support of worldwide economic stimulus packages, global demand could offer some upside surprises. However, expectations for further development in 2010 and thereafter are considerably more pessimistic. The development of commodity prices, the lack of a full recovery in the financial sector, the effects of the crisis on corporate balance sheets and the heavily stressed labour market, which has the potential to slow down consumption – and strong consumption would be needed for an internally driven upswing – are major risk factors. “We assume that further economic recovery in Austria will only progress at a moderate pace over the course of 2010 and that there is a high risk of setbacks,” says Bank Austria chief economist Bruckbauer. The brakes on economic growth have still not completely let up. “Despite the 3.8 per cent decline in GDP in 2009, the domestic economy is expected to grow by 1.1 per cent in 2010,” says Bruckbauer with cautious optimism.

However, Bank Austria’s economists point out that in 2010 growth will still not reach the levels seen in 2008; according to Bank Austria’s calculations, this will remain the case until the end of 2012, which will have a negative impact on the labour market, investment and corporate balance sheets. As a result, unemployment will also rise in 2010, and investments will not contribute to growth because of limitations resulting from low capacity utilisation. “In spite of the recovery in the coming quarters, the level of production will remain below its potential for quite some time to come, which will have a very negative impact on the labour market,” says Bruckbauer. Even if the recovery brings upside surprises, a high level of uncertainty persists regarding the effects of Austrian and European economic growth remaining below potential for a prolonged period of time. Bank Austria’s economists therefore advise against withdrawing economic measures – particularly monetary policy – prematurely. This could have even more serious consequences than a delayed withdrawal. A reversal in the economic policy framework will only make sense when there is sufficiently secure data to affirm the sustainability of the economic recovery.

Inflation set to rise, but still at a moderate level
The beginning of the recovery has also coincided with the reversal in inflation trends. “Following the drastic decline in inflation in recent months, which culminated in negative territory in the summer, inflation will begin to edge up again in the autumn,” says Bank Austria economist Walter Pudschedl. The main cause of this is the trend in commodity prices, particularly crude oil. Beginning in October, the inflation-suppressing influence that crude oil has had up to this point will reverse again. At around USD 70 per barrel, the current oil price is at the level from last October and well above the prices from November and December of last year. The burgeoning hopes of economic growth will hinder another decline in commodity prices. Inflation, which was still in negative territory in August of this year, will rise to nearly 1 per cent by the end of the year. Assuming that oil prices remain relatively stable, inflation is expected to be moderate in 2010. “Following average inflation of just 0.4 per cent in 2009, we expect inflation to rise to 1.2 per cent in the coming year,” says Pudschedl. According to Bank Austria’s economists, there is no need for the European Central Bank to take action regarding the key interest rate, which will be kept at its current low level until the end of 2010.  

 charts (PDF; 31 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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