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12.08.2011

Bank Austria Business Indicator:
End of the dog days of economic recovery

  • Bank Austria Business Indicator continues its decline in July to 2.4 points
  • Consumer and industrial sentiment worsens – foreign trade, which fuelled the upturn until now, loses momentum
  • A strong start to the year means that overall economic growth for 2011 remains above 3 per cent – with an economic slowdown forecast in the second half of the year
  • Outlook for 2012: volatile international conditions will burden Austria's economy – GDP growth to remain under 2 per cent

It is now quite some time since the economy peaked. Bank Austria's chief economist Stefan Bruckbauer says, "The Bank Austria Business Indicator continued its decline in July, falling to 2.4 points. The Austrian economy has in fact been showing signs of cooling since the end of the first quarter. Indeed, the current level of our business indicator suggests that it has cooled even further." The domestic economy began to recover about two years ago. From the middle of 2010 onwards, there was a strong upward trend, but now, at the mid-point of 2011, it is experiencing a distinct loss of momentum.

In his analysis, Bank Austria economist Walter Pudschedl comments: "Economic sentiment has worsened across the board during the summer, which is the main reason why our business indicator has fallen. Furthermore, both consumers and industry alike are taking a less optimistic view of the coming months." Persistent high inflation is dampening the mood of the Austrian consumer. In addition, consumers seem ever more unsettled by the debt crisis in the USA and some European countries. The positive trend in the Austrian labour market is being overshadowed by expected cuts to the national budget and further economic woes. Domestic industrial companies are also adopting a markedly more cautious view of their future business prospects in July compared to a few months ago. Meanwhile, a fall in new orders is eroding order backlogs. Support from abroad is clearly waning, and declining industrial confidence in nearly all European countries does not suggest that the mood is about to change. European industrial confidence, weighted by Austria's share of trade, has now declined quite considerably for the fourth month in succession. "Sentiment within industry and among consumers is now at its lowest ebb since mid-2010, when the economic recovery had made only tentative progress", adds Pudschedl.

"In the second quarter, economic growth, which was at least 0.5 per cent compared to the previous quarter, turned out to be lower than at the beginning of the year. Nevertheless, the recovery remained very strong until the summer. Since the mid-point of the year, the economy has begun to slow down noticeably, though", says Bruckbauer. The leading indicators have turned and are trending downwards. Foreign trade, which fuelled the strong upturn, is losing momentum. Although domestic demand is proving fairly robust despite strained international conditions, it cannot make up for the shortfall abroad. "In the second half of the year, the domestic economy will make a slow recovery at best. The risk of the upward trend actually coming to a temporary standstill has increased significantly. Thanks to the strong start to the year and an economy growing at just a little under 4 per cent year-on-year in the first six months, we still expect GDP to rise by 3.1 per cent for 2011 as a whole", says Bruckbauer. During 2011 the Austrian economy has therefore fully made up what it lost in the slump of 2009 and, by the end of 2011, it will already have exceeded the pre-crisis level by a good margin.
 
"The Austrian economy's prospects for growth are being hit hard by global conditions which are marked by heightened uncertainty. We expect a noticeable decline in economic growth for 2012 to 1.8 per cent", says Bruckbauer. Although Bank Austria's economists reckon that a double-dip recession is unlikely, the most recent economic data clearly indicate the risk of a prolonged international downturn, which will harm Austria's economic prospects. Furthermore, efforts to consolidate government budgets could exacerbate the cooling of the world economy already underway. It will not be possible to maintain the pace of exports next year under these conditions so there will be less of a boost to the Austrian economy compared with 2011. In addition, there are limited prospects for domestic demand if both consumers and employers tighten their purse strings due to uncertainty. "Our expectation for growth in 2012 of rather less than 2 per cent now appears well justified", says Bruckbauer.

In these fiscal conditions, and with monetary tightening expected, there is hardly any prospect of a perceptible revival of the economy in the medium term. "Even if we are not expecting economic momentum in Austria to come to a complete standstill, we can certainly reckon with a weak upward trend at best over the next few years. In the medium term, we see similarly volatile conditions with moderate growth below a ceiling of 2 per cent", concludes Bruckbauer.

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

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