Bank Austria Business Indicator:
Economy slowing further

  • Bank Austria Business Indicator falls again in June to 2.6 points
  • Industrial sentiment worsening in the most important export markets
  • Inflation of over 3 per cent hampering consumption
  • Growth down by half in the second quarter at 0.5 per cent, 1.8 per cent growth projected for 2012
  • Increasing impact of structural problems after strong recovery, but investments still on the rise

The slowdown in growth that began in the Austrian economy in April continued in June. "The Bank Austria Business Indicator fell to 2.6 points in June. The significant slowdown in growth came after four strong quarters, just as we were expecting," said Bank Austria's head economist Stefan Bruckbauer.

"The economy is cooling at an increasing rate in all of our important export markets, and after months of optimism, most industrial companies are not expecting any more growth," said Bruckbauer. This is not yet the case for Austria's most important trade partner, Germany, but it already is in many other export markets. In line with the worsening sentiment in the export markets, spirits in Austria's industry are also down. "While the expectations in Austria's industry are dampened as in other European countries, the majority of consumers in Austria, Germany and a few other countries are still optimistic. But the trend here is pointing down, as well," explained Bruckbauer. After pre-crisis levels were reached in many areas, it is becoming clearer that there is not enough impetus for a lasting upswing.

"In the first half of the year, Austria's industry and exports came close to pre-crisis levels, and the overall economy and employment fully reached these levels. But now, optimism about the continuation of this upswing is waning," continued Bruckbauer. And in line with this, economic growth in the second quarter was likely only half what it was in the first quarter. After the economy expanded by nearly one per cent per quarter over the last four quarters, economists have estimated a growth rate of not quite 0.5 per cent for the last three months. Exports grew again nicely in the first months of the year, but the fact that imports were also stronger prevented this from translating into more economic growth. 

Consumption still down despite a record number of jobs
The still positive consumer sentiment is based partly on the good situation on the labour market. The number of employed persons in Austria grew continuously by over 30,000 during the first half of the year. However, the number of unemployed persons has also been rising again slightly since April. The main factor behind the reluctance of Austrian consumers to spend is likely the one per cent increase in inflation between the beginning of January and the end of the second quarter. "Higher inflation is dampening consumption in Austria, and the inflation rate is going to stay over 3 per cent in the coming months," said Bank Austria economist Walter Pudschedl. He continued: "We aren't expecting inflation to fall significantly below 3 per cent until 2012." The reluctance of households to take out credit in the first months of the year also slowed consumption.

Structural challenges and the current crisis hampering the economy
Despite the worsening sentiment in industry, investment activity will continue to increase. "After the strong recovery over the past months and the lengthy postponement of investments during the crisis, investment activity will grow in the coming quarters despite the ailing sentiment," said Bruckbauer.

The effects that the current confidence crisis in the Eurozone will have on the development of the real economy are not yet clear. It is clear, though, that economic growth will be slow in the coming years even after the current difficulties are overcome. The likely elimination of many disparities within and also between the countries combined with significantly lower risk appetite, expressed in part through more restrictive supervisory regulations, will bring noticeably reduced growth potential. "The medium-term pessimism that is being fuelled by the many structural problems is increasingly causing companies to shy away from expansion and other forward-looking investments," said Bruckbauer. And the fact that it has not yet been possible to overcome these challenges is causing this pessimism to grow. But the Austrian economy will continue to expand. "Despite the current difficulties, we expect the Austrian economy to grow in the second half of the year, if at a lower rate, and to continue expanding in 2012," said Bruckbauer. The economists at Bank Austria are still projecting 3.1 per cent economic growth for Austria this year, and 1.8 per cent in 2012.

 charts (PDF; 168 KB)

Enquiries: Bank Austria Economics & Market Analysis Austria
 Stefan Bruckbauer, tel. +43 (0) 50505 - 41951;
 E-mail: stefan.bruckbauer@unicreditgroup.at

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