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Bank Austria Business Indicator:
Economic downturn slowly bottoming out, recovery not yet in sight

  • Bank Austria Business Indicator posts a gain for the first time since the middle of 2007, but remains deeply in the red
  • Negative GDP growth expected to slow to 0.5 per cent qoq in the second quarter
  • Falling prices in the summer – inflation just 0.4 per cent in 2009
  • Economy will not reach pre-crisis levels until 2013

"The downward trend that has plagued the Bank Austria Business Indicator since the middle of 2007 has been broken. After signs of a stabilisation in April, the indicator increased by 0.4 points to -2.5 in May," says Stefan Bruckbauer, Bank Austria's deputy chief economist. The index recovered across the board, with improvements in all of the individual subcomponents. Especially sentiment among Austrian consumers has recovered from the record low seen in the previous month. The tax reform that went into effect on 1 April has now made its way into consumer' wallets, which has more than compensated for the continuing deterioration on the labour market. The negative business expectations in European industry continued to gradually improve in May. Smaller decreases in incoming orders, a deceleration of the negative growth in order backlogs and somewhat more favourable price trends supported a slight improvement, which was also reflected in the sentiment in domestic industry. The business expectations in Austria are now less pessimistic than in the first quarter of the year. "The current Bank Austria Business Indicator is still at an extremely low level and is clearly in negative territory. Therefore, the slight upward movement in May is solely an indication that the slide following the poor start to the year is now slowly coming to an end," says Bruckbauer.

Smaller decrease in the second quarter
However, the Austrian economy is still losing momentum at a considerable pace. "Following the dramatic 2.6 per cent qoq decrease in GDP at the beginning of the year, the Austrian economy continued to contract from April to June; however, the estimated GDP growth of -0.5 per cent in this period is much less drastic than the previous figure," says Bank Austria economist Walter Pudschedl. The more favourable survey results and the stabilisation of the Bank Austria Business Indicator in the last two months are now being confirmed by leading economic indicators. The drop in industrial production started to stabilise at the end of the first quarter and the decline in exports has decelerated significantly.

Inflation coming to a halt
Inflation is now the lowest it has been in about ten years, a situation that is being supported by weak economic activity and strongly influenced by the downtrend in energy prices and the general price correction among commodities, especially agricultural commodities. According to the estimates of Bank Austria's economists, inflation will even come to a halt in June and will briefly fall into negative territory over the summer as a result of the dampening base effects of commodity prices. Although the underlying price trend is still headed downward due to overcapacities all over the world, the many signs of economic stabilisation and expansive monetary and fiscal policies are causing inflation expectations for the medium term to rise. As long as monetary and fiscal policy remains expansive, a classic deflation scenario cannot be expected. Instead, inflation is much more likely to once again increase up to the end of the year supported by the most recent rise in oil prices. "We expect average annual inflation of 0.4 per cent in 2009, and price growth will also remain moderate in 2010 at an average of 1.1 per cent," projects Pudschedl.

Economy will not reach pre-crisis levels until 2013
Although the current Business Indicator shows a considerable deceleration in the pace of the economic decline, the Austrian economy is only gradually approaching its low point. Bank Austria's economists expect to see a decrease in GDP in the second quarter – albeit a slight one. The Austrian economy will not return to sustained growth until the beginning of next year. The decisive factor here is the development of global demand, which, in an environment that will increasingly be characterised by a tightening of belts in monetary and fiscal terms, will only see a moderate revitalisation. "Following the significant decline of 3.5 per cent in 2009, we do not expect to see positive economic growth next year, either. We are projecting a slight decrease in GDP of 0.3 per cent for 2010," says Bruckbauer, adding, "Since we can only expect to see a restrained economic recovery in the medium term, the Austrian economy will not reach the real level of prosperity seen before the crisis for another four to five years."

 charts (PDF; 30 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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