Bank Austria Business Indicator:
Austria sinks into recession
- Bank Austria Business Indicator reaches new low in January
- Economic downturn in the final quarter of 2008 marks the beginning of a longer recessionary period
- Export economy feels the pinch, slump in investments
- Economic growth in Austria will contract by 1.6 per cent in 2009
At the beginning of 2009, the Bank Austria Business Indicator again moved downward, signalling that the downturn of the Austrian economy will continue. The indicator has now been falling for twelve months in succession. It turned negative in November, reaching new record lows in monthly intervals. Most recently, the indicator fell to a low of -1.5 points in January from -1.1 points in the previous month.
"January saw a further deterioration of all index components. After stabilising briefly at the end of 2008, sentiment of Austrian consumers has again worsened considerably “, says Stefan Bruckbauer, Deputy Chief Economist of Bank Austria, adding: "Favourable factors such as relatively strong wage increases accompanied by a marked fall in inflation in December and the imminent tax reductions were for the most part negated by the growing uncertainty prompted by very negative labour market trends". In Austrian industry, confidence levels also dropped further in January, although the decline in confidence slowed somewhat at both the European level and among Austrian companies. This supports expectations that the free fall experienced by the industrial sector may soon be coming to an end. Moreover, the faint, positive signals that the decline in new orders may be stabilising, discernible in the January survey among purchase managers, are now becoming stronger. "The slowdown of the deterioration in confidence in industry may have nourished hopes that the economic downturn could soon hit bottom. However, in view of the continued downward movement of the Bank Austria Business Indicator to a new low of -1.5 points it is clear that any recovery of the economy cannot be expected before the final months of the current year“, Bruckbauer maintains.
Stronger contraction of economy in the first quarter of 2009
The economic downturn in Austria, reflected in a 0.2 per cent quarter-on-quarter decline in GDP in the fourth quarter, is now followed by a period of recession. "The Austrian economy has contracted for the first time since the first quarter of 2001, signalling the end of a period of 30 quarters of continued growth“, says Walter Pudschedl, economist at Bank Austria, adding: "The weak final quarter of the previous year was however just the beginning. The data for the first quarter of 2009 will be even poorer“.
Bank Austria's economists believe that the downturn will accelerate in the first few months of the current year because the Austrian economy responds to developments in Europe's key markets with a time lag. The economies of most eurozone countries started to contract earlier, a process which – in the fourth quarter – has probably culminated in the sharpest decline in the current business cycle.
Sharp decline in exports and investment
Austria's delayed response to economic developments is explained by its strong dependence on foreign demand. The Austrian economy is now increasingly feeling the impact of the contraction of global demand via its export-oriented (supply) industry. In light of current data for new orders, it is possible that the first few months of the current year may even see a year-on-year double-digit decline in exports. As at year-end 2008, the very poor performance of net exports will result in a sharp contraction of economic growth in the first quarter. "In addition to exports, investment activity will slow on account of the adverse global environment. GDP growth is therefore likely to contract by about 1 per cent over the previous quarter in the first quarter of 2009", Pudschedl says.
Austria in the recession – only slow recovery in 2010
With growth contracting both in the fourth quarter of 2008 and in the first quarter of 2009, the Austrian economy is, by definition, in recession. The continued downward movement of the Bank Austria Business Indicator and the unabated deterioration of the global business environment moreover suggest that the Austrian economy will continue to contract. While there are currently no signs of a turnaround, Bank Austria's economists expect economic growth to improve slightly towards the end of 2009. The phase of interest rate reductions initiated by the ECB, which it will continue, and the government support measures aimed at supporting consumption and investment, will start to have a positive impact on the economy later in the year. The subsequent recovery will only be very gradual due to the moderate nature of the impetus from abroad. The economy will therefore grow at only a moderate rate in 2010. Bruckbauer summarises Bank Austria's current GDP forecasts: "Following GDP growth of 1.8 per cent in the past year, I now expect the economy to contract by 1.6 per cent in 2009. Next year we might see moderate growth of 0.7 per cent".
This forecast is based on the hope that economic policy in Europe, especially monetary policy, responds with sufficient resolve and employs all tools that are either currently available or which need to be newly created. The risk of a yet stronger contraction is moreover much higher than the risk of inflation. "Traditional monetary measures and economic programmes will not be enough to achieve a permanent turnaround in the foreseeable future“, Bruckbauer concludes.