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Bank Austria Economic Indicator:
Economic recovery continues in spring

  • Bank Austria economic indicator accelerates upward trend in February
  • Austrian consumers are more optimistic than the European average
  • Inflation will not rise in the course of 2010
  • Growth prospects restricted in the medium term – GDP forecast unchanged at 1.3 per cent for 2010 and 1.4 per cent for 2011

Positive economic signals have increased in the past few weeks. "Current data indicates that the recovery of Austria's economy is more stable at the beginning of spring and will be able to keep the current speed", says Bank Austria's chief economist Stefan Bruckbauer. The constant improvement of the economic environment since its low shortly before mid-2009 has even accelerated. "Bank Austria's current economic indicator considerably rose from 0.6 per cent in the previous month to 1.1, thus clearly indicating growth for the Austrian economy. The indicator's upward trend has been constant for ten months already and in the past three months, even all elements continuously indicated an upward trend", Mr Bruckbauer continues. Never ever in his history of more than 20 years, the Bank Austria economic indicator has had such a long continuous upward trend. Despite the temporarily strongest economic decline since WW II, such a robust positive trend is not natural, Bank Austria economists say.

The surprisingly positive development of the consumer sentiment contributed particularly to the increase of the Bank Austria Economic Development. Domestic consumers are more optimistic at the beginning of spring despite the tense labour market situation which, however, shows a more favourable trend again. "Austrian consumers' spending mood is considerably better than the European average. The discussion about a possible increase in excise duties has not changed that either", says Mr Bruckbauer. The mood in Austria's industry has also improved supported by a better incoming orders situation. This is a surprise given the restrained and inconsistent trend on European level. Average confidence in the euro zone's economy rose only slightly due to increasing economic risks in some peripheral countries. However, the indicator calculated by Bank Austria economists, weighted with domestic foreign trade and decisive for Austria, still shows a significant increase as the most important export markets – Germany and Italy – improved further. The mood in the domestic industry is currently improving above average and now is again on the level of late summer 2008 when business prospects were overcast by dark clouds gathering on Austria's economic sky.

Due to the favourable development of mood indicators and the available solid data, Bank Austria economists expect the domestic economy to have been on a growth course in the first quarter of 2010, too. "After the GDP rose 0.4 per cent in the final quarter of 2009 over the previous quarter, Austria's economy was able to continue the dynamic development to a major extent in the first months of the current year. We expect economic growth of 0.3 per cent at least", Bank Austria economist Walter Pudschedl says. Thanks to global economic recovery, foreign trade was the decisive growth driver at the beginning of 2010. The export-oriented industry was able to benefit from that trend, particularly as the euro's depreciation of an average of 6 per cent against the US dollar compared with the previous quarter supported foreign demand. Private consumption still is a stable element of constant recovery, too. The stabilization of the labour market supports the benefit of low interests and tough price competition. While the public sector still strengthened the economy, private investment continued to be restrained but is expected to improve considerably earlier this year.

Stable inflation
Given the stable but rather restrained economic recovery, there is no reason for concerns about a strong increase in inflation soon, Bank Austria economists say. Following the slight increase in annual inflation to 1.2 per cent earlier this year, February and the following months are expected to see inflation on a similar level. The development of commodities prices still has a decisive influence on the development of inflation. "Assuming only a slight increase in the oil price from an average of USD75 to USD85 a barrel and – compared with 2009 - a hardly unchanged average annual exchange rate of the euro against the US dollar, annual average inflation will amount to 1.2 per cent only in 2010. For 2011, we expect a moderate upward trend due to small economic growth to 2 per cent. However, we consider the risk of a considerable increase in inflation rather low in the medium term", Mr Pudschedl says. According to Bank Austria economists, two significant conditions for a strong price increase in the future do not exist. On the one hand, demand for goods still is too low and meets providers which can fall back on enough unused capacities. On the other hand, too much money would have to be in circulation. Liquidity provided by central banks, however, is recollected again. Central banks are tightening their monetary policy and as a result, no additional money, which could spur inflation, is in circulation.

Growth will remain restrained in the medium term
The constant upward trend of the Bank Austria Economic Indicator clearly indicates that economic recovery in Austria continues. However, a significant upward trend, which would be necessary in order to make up for lost economic ground rapidly following the sharp decline of the previous year, is not indicated by the indicator's current acceleration. But the current speed is expected to continue with relatively small cuts. Growth rates of 0.3 to 0.4 per cent compared with the previous quarter are thus likely in the course of the year. "We keep our GDP forecast for the full year of 2010 unchanged at 1.3 per cent. Given the limiting factors for all demand-related elements, we do not expect a considerable acceleration of growth in the medium term either. For 2011, we expect the GDP to rise 1.4 per cent", Mr Bruckbauer summarizes the growth estimates made by Bank Austria economists. Foreign demand will no longer be a strong growth driver in the medium term due to the expected reduction of foreign trade imbalance worldwide. While the tense situation in the labour market will continue putting a strain on private consumption for a longer period of time and investments will remain restrained due to companies' insufficient degree of utilization, the public sector, which has had a constant positive effect on economic recovery, is not expected to provide any fresh growth stimulus. Efforts to reduce the increased budget deficits as well as debts will strongly limit the leeway in public economic policy in the next few years. This means that - given the current global economic conditions - Austria's economy will not see any significant factors leading to higher growth in the medium term.

 charts (PDF; 72 KB)

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

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