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17.12.2010

Bank Austria Business Indicator:
Economy moves smoothly into the New Year

  • Bank Austria Business Indicator in November still at the highest level since September 2007
  • Strong sentiment within the Austrian economy remains unbroken
  • Growth divergence in Europe more pronounced – Austria, with economic growth of about 2 per cent, is on Europe’s bright side
  • Austria benefits from its relatively low indebtedness on financial markets
  • Slight upward pressure on prices as the year draws to a close


"It is over three years since Austria’s economic players have assessed the situation as positively as they have today. In particular, the mood within industry is very optimistic thanks to the continued recovery of the global economy, and consumer sentiment has remained very strong since the summer on account of the favourable labour market trends", said Helmut Bernkopf, Management Board member of Bank Austria with responsibility for Corporate & Investment Banking, when the November data of the Bank Austria Business Indicator were disclosed.

Austria’s economic environment continues to improve. "The Bank Austria Business Indicator reached 4.2 points in November, thereby maintaining the 3-year high of the previous month, and sentiment within the Austrian economy is improving steadily", explained Stefan Bruckbauer,  Bank Austria’s Chief Economist.

Confidence within Austrian industry again improved over the turn of the year 2010/2011 as Austria’s manufacturing sector increasingly participates in the upturn. The upturn has spread from the emerging markets in Asia and Latin America via Germany to Austrian supply companies. "For the first time in 18 months, sentiment in Austria’s manufacturing sector is even better than the EU average, and within the European Union Austria is outperformed only by Germany, an engine of economic growth, the Scandinavian countries, and the heavily export-oriented Eastern European countries: the Czech Republic, Hungary and Slovenia", explains Walter Pudschedl, economist at Bank Austria. Confidence is improving in the markets which are of particular relevance for Austria’s industry, and this has a favourable impact on sentiment in Austria. The sentiment value, weighted by the proportion of Austria’s foreign trade, is also well above the unweighted average of European industrial confidence.

The tailwind experienced by industry, the unbroken strong growth in employment and the pronounced decline in unemployment figures have in the last few months boosted consumer sentiment in Austria. Although sentiment has meanwhile leveled off somewhat, Austrian consumers are much more optimistic about the future than their counterparts in Europe as a whole. Sentiment in Austrian industry and among consumers is significantly better than that of most countries in the euro area. Since the beginning of the debt crisis, the gap has in particular been widening considerably vis-à-vis the EU peripheral countries. "While Austria is in a position to take advantage of opportunities offered by global economic recovery thanks to structural reforms undertaken in the past and the – by now customary – restraint exercised in the collective bargaining agreements, the peripheral countries whose financial system has been impacted by the crisis face severe problems. The divergence within the European Union is increasing", maintains Pudschedl.

While the forthcoming budget consolidation measures will dampen prospects for private consumption in Austria, the need for such measures is much less acute than in most other euro area countries. Private consumption will therefore be hardly affected and thus remain an engine of growth in 2011. Bank Austria’s economists expect the impact of the public budget – in an international comparison – to curb economic growth only slightly in 2011, by a little over one half of a percentage point, and this can be offset by Austria’s strongly export-oriented economy, even under more unfavourable global conditions. "After rising by 1.9 per cent in 2010, we expect GDP to accelerate to 2 per cent in 2011. The favourable sentiment values and the current  Bank Austria Business Indicator moreover suggest that the good performance of the Austrian economy will continue into the New Year, and there is a greater likelihood that the economy could in 2011 outperform expectations", says Bruckbauer. In 2011, Austria will in any event be among the euro area countries with disproportionately strong growth.

"If economic conditions are a little more favourable, the planned deficit of 3.2 per cent of GDP could not only fall to below this figure in 2011, but may even again meet the Maastricht criteria ahead of time ", says Bruckbauer. While the budget deficit of the euro area will probably amount to 4.6 per cent of GDP, Austria will be in an advantageous position by international comparison. At just under 70 per cent, Austria’s total public debt is also much lower than that of the euro area’s estimated 84 per cent of GDP, and even lower than that of Germany. "Austria’s relatively favourable debt position in an international comparison makes it easier for the country to raise funds on financial markets, and enables Austria to temper the pace of budget consolidation with a view to mitigating the impact on economic growth. It is however essential to further reduce the structural budget deficit", explains Bruckbauer.

Higher inflation as the year draws to a close
In November, year-on-year inflation in Austria amounted to 1.9 per cent, higher than in the summer months but still fairly modest. Higher prices for agricultural products on global markets have pushed up foodstuff prices, and commodity prices are also moving upwards as a result of a more favourable global economic environment. In addition, the euro, which is currently somewhat weaker than in the previous year, is exerting upward pressure on prices. The prices of many services and durable consumer goods however remain at a low level, reflecting the absence of economic growth-induced inflation. "We expect the inflation rate to be relatively stable at around 2 per cent in the next few months. Even if upward pressure is tending to increase as a result of strong dependence on external price factors, we expect inflation to average a moderate 2 per cent in 2011 following 1.8 per cent in the current year", Bruckbauer explains.

Risks
However, despite this strong optimism over economic developments there is in the shorter term still the risk that the euro debt crisis could escalate if policymakers fail to point the way forward. The danger remains that the euro area could be jeopardised by a policy aimed at optimising sentiment in the shorter term. "In the next few months it could be important for politicians to also accept short-term disadvantages in favour of the long-term benefits of a single currency. From a current perspective this is unfortunately not yet certain", Bruckbauer says of the risks for the otherwise so optimistic outlook for Austria in particular.


 charts (PDF; 120 KB)


Enquiries: Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, tel. +43 (0) 50505 41957;
e-mail: walter.pudschedl@unicreditgroup.at 

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