Bank Austria Business Indicator: Momentum of economic downturn slows after sharp decline at the beginning of the year
- Economy contracts by 3 per cent in 2009, less than in the eurozone
- Consumption cushions the downturn despite a strong rise in unemployment
- Support from the sharp rise in incomes during the last upturn and from the tax reform
- Medium-term prospects remain challenging
"In April, the Bank Austria Business Indicator fell to a new low of -2.3 points. This marginal decline on the previous month suggests that the indicator could soon start to stabilise at a low level“ says Stefan Bruckbauer, Deputy Chief Economist of Bank Austria. This view is supported by initial positive signals discernible among the indicator's specific components. Sentiment within European industry improved a little at the beginning of the second quarter of the current year. April for the first time saw a reversal of the growing pessimism of companies that had already been apparent for one year. The reversal involved almost all markets, but especially the large countries such as Germany, Italy and France, which are of major importance for Austria's manufacturing sector. Within Austrian industry, sentiment over future prospects is not quite as negative as before. "Following the rise of the Bank Austria Purchase Manager's Index, the current Bank Austria Business Indicator is our second leading indicator which suggests that the downturn in economic activity may be beginning to lose momentum. However, the renewed deterioration in consumer sentiment indicates that the domestic economy still has a long way to go before hitting bottom“ Bruckbauer explains.
Black 1st quarter
Bank Austria's economists believe that the Austrian economy experienced one of its sharpest declines ever at the beginning of the current year. The reasons for this dramatic deterioration were the negative development of foreign demand and the slump in investment activity. As global demand remains weak, Austrian exports contracted by over 7 per cent in the first three months of 2009 compared with the preceding quarter, on a seasonally adjusted basis. As imports fell more slowly, the contribution from foreign demand to Austria's overall economic performance was negative. The fall in investment activity at the beginning of the year was even more pronounced. The marginal decline in construction cushioned the slump in overall fixed capital investments, while the double-digit fall in output in the capital goods industry has most probably led to a massive decline in investments in plant and machinery. "After contracting by 0.2 per cent in the fourth quarter of 2008, the economy was in free fall in the first three months of 2009. We are assuming economic growth of minus 1.6 per cent on the preceding quarter and minus 6.4 per cent year-on-year“ says Walter Pudschedl, economist at Bank Austria.
Bank Austria's economists believe that consumption was a stabilising factor at the beginning of the year. Following a considerable rise in real incomes, largely a result of the sharp fall in inflation, and positive effects from the tax reform, private consumption will remain stable in the forthcoming months. It will therefore continue to help mitigate the economic downturn. "On account of the heavy job losses and the strong rise in unemployment, which will soar from 5.8 per cent in the previous year to an estimated 9 per cent in 2010, the role of private consumption as a stabilising factor in the economy will be more limited in the next few months“ maintains Pudschedl. Overall, consumption will for the moment help to mitigate the severity of the economic downturn, but the longer the slowdown continues, with a consequent increase of the negative impact on the labour market, the greater the risk that private consumption will no longer be able to act as a support mechanism.
More favourable performance of the Austrian economy
The most recent data and the current Bank Austria Business Indicator support the belief that the Austrian economy is moving from a period of dramatic decline into a phase of a slower downturn. The economy will nevertheless contract in the forthcoming quarters of 2009, but less sharply. It will start to bottom out at the turn of the year 2009/2010, after previously reaching its low point. In the medium term, economic growth will be moderate as global demand remains sluggish.
"After the severe decline in economic activity at the beginning of the year, and given the tenacity of the downturn, we have raised our assumptions for the decline in GDP for 2009 from 2.2 per cent to 3 per cent“ says Bruckbauer in summarising Bank Austria's new forecast. The decline in Austria will however be much less pronounced than in Germany, for example. Unlike Germany, Austria's economy during the last growth period was primarily supported not by foreign trade but by consumption and investment activity. Consumption did not provide an impetus to growth in Germany. This is partly explained by significantly lower growth in incomes in Germany: since 2003, wages have increased by around 8 per cent, much more slowly than the 21 per cent growth recorded in Austria in the same period. Bank Austria's economists consequently do not expect the global slump in economic activity to affect GDP growth in Austria as severely as in Germany. This assumption seems to be confirmed by developments since the beginning of the year: although the export industry in Austria has been impacted as severely as that of Germany, industrial output has not fallen as sharply as in Germany. Retail business has also fared better in Austria than in Germany. "Although it was apparent early on that Austria could not escape the global downturn, we now expect the Austrian economy to contract less than the German economy despite the fact that exports slumped just as they did in Germany. Our assumption is based on domestic demand, which should be supported by income growth which during the last economic upturn was more than twice as high as the German growth rate“ says Bruckbauer.