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Bank Austria Business Indicator:
Recovery continues, but will soon lose momentum

  • Bank Austria Business Indicator improved again in September, but the upward trend slowed
  • Recovery set to taper off after the turn of the year, but no new slump
  • Weak investment hampers recovery in 2010
  • Modest rise in inflation, but still no need to change the monetary policy stance

The upward trend in the Austrian economy continues. In September, the Bank Austria Business Indicator improved to -0.7 points, from -0.9 in the previous month. "The rebound in economic activity in Austria is continuing for now. But the flattening upward trend in the Indicator in September suggests that the recovery will begin to weaken again soon," notes Bank Austria's chief economist, Stefan Bruckbauer, discussing the current result.

In particular, the economists at Bank Austria see the trend in sentiment in European industry right now as being a very important sign that the current strong tailwind for the domestic economy will probably die down again soon. In previous weeks some of the leading indicators were disappointing, and European business sentiment only improved marginally in September. Indeed, in some countries – including Italy which is Austria's second most important trading partner – sentiment actually worsened again. Uncertainty about the durability of the recovery is also reflected in domestic business confidence, which only improved mildly in September and remains substantially below pre-crisis levels. "Due to the slowing pace of orders, the improvement in business prospects for European and Austrian industry is now more subdued, whereas consumer confidence is being hampered by the difficult situation on the labour market," says Bruckbauer.

Strong growth to continue after the turn of year, but pace of recovery tapering off thereafter
Following the dramatic declines seen in the first half of 2009, the Austrian economy has now emerged from the recession. "Backed by a favourable monetary policy, the economy has returned to a growth path, driven by strengthening export demand and robust consumption, which has been supported by fiscal policy measures. For the third quarter of 2009, we project GDP to grow by 0.3 per cent compared to the previous quarter, and the available indicators suggest that the Austrian economy will experience even more dynamic growth towards the end of the year," says Bank Austria economist Walter Pudschedl.
Nevertheless, a slowdown in the economic recovery is looming in the future, starting from the spring at the latest. "The global upturn in business will begin to falter when the ongoing process of restocking inventories seen in recent months comes to an end, and the stimulative effect of the fiscal policy measures begins to taper off. Consequently, the recovery will proceed more slowly in the first half of 2010," explains Pudschedl. Still, the economists at Bank Austria do not believe it is very likely that the Austrian economy will drift back into recession again, especially if there are no premature moves to withdraw the expansive economic policy measures.

Weak investment hampers economic growth
One decisive factor for the course of the economic recovery will be the development of investment. Bank Austria's economists see a number of aspects suggesting that investment will remain subdued for quite some time. "The currently low level of capacity utilisation, the poor liquidity situation due to the deterioration in earnings, changes in the overall policy framework such as equity capital requirements and supervisory regulations, as well as market participants' more cautious assessment of risk will all be factors that weigh on investment," says Bruckbauer. According to Bruckbauer, this will also restrict growth in lending. The weakness in investment will last into the coming year, and there is only expected to be a solid rebound in investment in 2011, which will then help put economic growth on a more solid footing again. Following a 3.8 per cent drop in GDP in 2009, Bank Austria economists forecast growth of 1.1 per cent in 2010.

Inflation rising modestly
In year-on-year terms, prices rose by just 0.1 per cent in September, and from the end of the year a steady increase is projected for inflation. The main reason behind this is the base effect from commodities, in particular oil prices. From October, the inflation-suppressing impact of oil prices will fade rapidly, and the improvement in the economic outlook will prevent commodity prices from declining again. By the end of the year, inflation will rise to around 1 per cent. Nevertheless, inflation expectations for 2010 are moderate, based on the assumption of relatively stable oil prices. "After just 0.4 per cent average annual inflation in 2009, we project an increase to 1.2 per cent next year," explains Bruckbauer. As a result, Bank Austria's economists see no need for the European Central Bank to take any action on the base rate, which should remain at its currently low level until the end of 2010.

 charts (PDF; 62 KB)

Enquiries: Bank Austria Economics & Market Analysis
Walter Pudschedl, Tel. +43 (0) 50505 - 41957
E-Mail: walter.pudschedl@unicreditgroup.at

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