Bank Austria Business Indicator: Recovery continues, but somewhat more slowly
- Bank Austria Business Indicator falls slightly in December
- Consumers a touch less optimistic, but industry mood brightens up
- Slower GDP growth in Q4 of around 0.7 percent, overall growth in 2010 +1.9 percent
- 2011 recovery more broadly based with GDP growth of 2 percent
- Growth on a regional level is more balanced
While economic activity started briskly in 2011, it does appear as if the Austrian economy left its most dynamic recovery phase behind it as we moved into the New Year. "In December the Bank Austria Business Indicator fell short of the 3-year highs posted in the previous two months. In spite of the modest decline though, the current reading of 3.5 points leaves no doubt that the Austrian economy continues to dictate a fast pace", explained Bank Austria chief economist Stefan Bruckbauer. Despite economic trends already having peaked, we can expect the ongoing recovery to continue in the months to come.
"Spirits remain high in Austrian industry. The upbeat business expectations at the turn of the year resembled those last seen in the middle of 2007", revealed Bruckbauer. Austrian industry is operating in a benign European climate where the most important trade partners of Austrian industry are currently looking forward to 2011 with growing confidence. "The waning optimism of Austrian consumers is largely responsible for the modest slowdown in progress made by the Bank Austria Business Indicator around the turn of the year", continued Bruckbauer. Even if the swing in sentiment is likely to be overplayed given the recently adopted budget for 2011 that provides for some new financial burdens and tax hikes, we can nevertheless expect to see a much calmer underlying mood among Austrian consumers and therefore just a moderately negative impact on private consumption and macroeconomic trends in the coming months.
According to the economists at Bank Austria, the pace of economic growth in Austria dipped slightly towards the end of 2010. "We estimate economic growth of 0.7 percent in Q4 2010 compared to the previous quarter, after 0.9 percent in the autumn. For 2010 as a whole we still believe that GDP growth will come in at 1.9 percent", maintains Stefan Bruckbauer. While domestic demand was able to pick up in the final quarter of 2010, as shown amongst other things by the strong retail figures, the pace of export growth dipped slightly.
"Economic growth in 2011 will be slightly higher than in the previous year, coming in at 2.0 percent, and what is more it will be based on a balanced growth mix", said Bruckbauer. The expected slowdown in the global recovery means that the impulses for Austrian foreign trade will weaken in the course of the current year. Consequently, the growth expectations for Austria's main trading partner Germany have fallen from 3.6 percent in 2010 to 2.5 percent in 2011. As a result, export growth will be lower in 2011 than in 2010, when the estimated nominal figure of 15 percent produced the highest result of the last ten years. The positive trends in orders suggest that foreign trade will continue to play a key role in driving growth this year, and may well account for 50 percent of Austria's economic growth. This means the upswing will no longer be based solely on exports, as was the case in 2010. "It is clear that the positive effects of the global recovery are increasingly spilling over into domestic demand. The recovery is spreading and the chances of seeing a self-sufficient upturn in fortunes are growing", said Bank Austria economist Walter Pudschedl.
"In 2011 Austria will no longer be so reliant on the global economy. Domestic demand will account for roughly half of economic growth, driven in equal measure by private consumption and investments", revealed Pudschedl. Boosted by the improvement on the labour market, especially by employment growth that is barely showing any signs of slowing, private consumption will grow almost as fast as in 2010. For the most part it will be possible to counter the negative effects of the stricter fiscal policy. The sharp increase in capacity-in-use of Austrian industry, the favourable order flow and the improved earnings and liquidity positions of companies will ensure investments pick up again through 2011. While this will be a moderate rise at the outset thanks to the subdued public sector, it will still be able to make a major contribution to economic growth.
Growth differences between federal states to contract in 2011
Industry, and thus exports too in terms of demand, will remain a key driving force behind the Austrian economy. This means growth expectations are high for the strong industrial federal states in 2011. Since the focal point of growth will slowly switch from intermediate consumption and capital goods to consumer goods, the prospects are good for industrial federal states which are more broadly based, like Upper Austria and Vorarlberg. Styria may also number among the strongest-growing federal states in 2011. "As domestic demand will be a significant factor for economic growth in Austria in 2011, and therefore the ongoing recovery will be far more balanced than in the previous year, we do not expect to see any major growth differences between the individual federal states", said Bruckbauer. Although Vienna and Burgenland will bring up the rear in 2011, they will only be marginally behind the average rate of growth.
The economists at Bank Austria do not reckon that the debt crisis will escalate at least for the time being. "Despite the risks in the euro area remaining rather high, we reckon the signals emanating from the market and politicians in the last few days can be viewed as real rays of hope", said Bruckbauer.