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16.11.2011

Bank Austria Business Indicator:
Austrian economy starts to slow

  • Bank Austria Business Indicator slips 0.4 points in November into negative territory for first time in two years
  • Economic growth expected at 2.9 percent in 2011 thanks to robust recovery in first six months of the year – the fastest rate since 2007
  • Outlook for 2012: moderate economic growth of 1.1 percent, inflation down to 2.2 percent, no improvement in sight on labour market, subdued consumer sentiment for some time to come
  • Another ECB rate cut to 1 percent expected around turn of the year

The cool-down in the Austrian economy is really starting to take shape. "In November, the Bank Austria Business Indicator slipped into the red for the first time since September 2009. Posting a figure of -0.4 points, the downward spiral which began in the spring has reached a temporary low", says Bank Austria chief economist Stefan Bruckbauer. The powerful recovery which has been underway for two years now has shuddered to a halt. "The Austrian economy currently finds itself at the edge of a sharp downturn, and the eventual recovery process will be a slow one", explained Bruckbauer.

"The economic climate hampered by negative expectations is significantly impairing outlooks. In November, the sentiment of Austrian producers and consumers worsened again", added Bank Austria economist Walter Pudschedl. The intensification of the European government debt crisis and the heightened concerns about economic activity have fuelled scepticism in Austrian industry, even though the mood at European level has remained stable. Moreover, the confidence displayed by Austrian consumers has transformed in just a few months into a slightly pessimistic view of future trends and developments. After the tangible setback in the pace of the recovery in the third quarter – which still managed to produce a moderate economic growth figure of 0.3 percent though when compared to the previous quarter – the outlook for the final quarter of 2011 is now more muted. "The high uncertainty in the economy is now increasingly surfacing in the real economic figures. In the fourth quarter we expect a stagnation of economic activity at best, but with the ongoing deterioration in the overall climate we can no longer rule out minus figures either", said Pudschedl.

The weakness of the Austrian economy towards the turn of the year is primarily attributable to the levelling off of global export demand, which will even nudge Austrian industry into a mild recession. The lack of any impetus from abroad is taking the wind out of the sails of investment activity. Both new and replacement investments are being put off amidst this uncertain environment. Private consumption continues to generate moderate growth, but the headwinds are gathering here too. Inflation will slowly recede in the next few months with a corresponding impact on real wages, a trend driven first and foremost by the slowing price growth in the commodity sector – especially for crude oil. But the already grim situation on the labour market is having a negative effect on the mood of consumers. "In spite of the sharp dip in economic activity towards the end of the year, we still anticipate economic growth of 2.9 percent for 2011 as a whole, thanks mainly to the powerful recovery in the first half of the year. This is the fastest pace of growth recorded since 2007", said Bruckbauer.

"Storm clouds are gathering on the economic horizon as we move into the New Year and the first few months of 2012. That said, in what remains of this year we can expect a pick-up in the economic lull thanks to more robust global growth trends, provided the foundations are laid for a solution to the European government debt crisis in the spirit of solidarity, and risk perceptions of economic participants return to normal. Overall we anticipate moderate growth of 1.1 percent for 2012", revealed Bruckbauer. As we move through the year, the pick-up in exports will be followed by faster investment activity and private consumption again. Yet the prospects remain quite bleak as tighter fiscal discipline is weighing down on growth trends across Europe. Meagre budgets are depriving public investments of funds, which will have a knock-on effect on the private sector as well. And this inflexible budget policy is set to pull the reins in on consumption in 2012 too. Although the deceleration in commodity price growth will nudge inflation down to an annual average of 2.2 percent, there is still no improvement in sight on the labour market, which will dampen consumer moods in the long run.

Loosening the monetary policy strings in 2012 will lend the Austrian economy some support. Given the grim economic and financial climate and the inflationary pressure which will soon ease, the ECB dropped its main refinancing rate to 1.25 percent in early November. "Around the turn of the year we expect to see a further cut to 1 percent, and we do not forecast any subsequent increase in interest before 2013", concluded Bruckbauer.

 charts (PDF; 106 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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