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Bank Austria Business Indicator:
Austria's economy continues to expand despite difficult environment

• Bank Austria Business Indicator underscores continued economic recovery in Austria in April with fourth increase in a row to 0.7 points
• Following GDP increase of 0.2 per cent compared to previous quarter, pace of growth expected to remain the same in second quarter of 2012
• Consumers temporarily making up for lack of foreign demand – more support from foreign trade again in second half of the year
• Growth forecast of 0.8 per cent for 2012 as a whole becoming more and more secure, chances of higher growth have decreased considerably
• Decline in inflation to end at the middle of the year: inflation to drop to 2.2 per cent on average in 2012 following 3.3 per cent in 2011
• Outlook: growth forecast of 2.0 per cent for 2013 under pressure due to divergent conditions
Unfavourable economic indicators in some European countries and the renewed increase in uncertainty in recent weeks due to the European sovereign debt crisis have not stalled the economic upturn in Austria. “The Bank Austria Business Indicator climbed to 0.7 points in April. The fourth increase in a row for the indicator demonstrates the impressive robustness of the economic recovery in Austria despite difficult international conditions,” said Bank Austria’s chief economist Stefan Bruckbauer enthusiastically. However, the Business Indicator still only points to a very subdued upward trend, and the current value is only slightly above the stagnation level. “Never in the 20-year history of the Bank Austria Business Indicator has an upward trend progressed in such moderate steps as in the past few months. The Austrian economy is only able to maintain a very modest pace of recovery as a result of the current environment, and there is still a risk of setbacks that would put the brakes on growth,” said Bruckbauer.

Signals from the industrial sector in particular clouded economic sentiment at the beginning of the second quarter of 2012. The sentiment indicators for the manufacturing sector have deteriorated substantially in virtually all of Europe. The index for European industrial sentiment is weighted with Austrian foreign trade and is heavily influenced by the development of the country’s two most important trade partners, Germany and Italy. Due to the volatile environment, this index has retreated back to the level seen at the turn of 2011/2012 and is thus developing in line with the values of the purchasing managers indices, which indicated a considerable decline in the sector in April. “Sentiment in Austrian industry worsened significantly in April due to the negative conditions in Europe and has once again fallen below the long-term average. In regional comparison, however, the situation is seen as relatively favourable, and Austrian consumers are among the most confident in Europe,” pointed out Bruckbauer. Consumer sentiment has seen a noticeable improvement in recent weeks. Employment has risen dramatically since the beginning of the year and the decline in inflation has led to increases in real income. These factors have had a positive impact on the recent development of retail sales.
Following the Austrian economy’s return to growth with a GDP increase of 0.2 per cent in the first quarter of 2012, we expect the upswing to continue in the second quarter as well. However, the Bank Austria Business Indicator suggests that the pace of the recovery will remain quite moderate. “In the second quarter, we expect the growth seen in Austria at the beginning of the year to continue unchanged, with a GDP increase of 0.2 per cent compared to the previous quarter. According to our estimation, private consumption will take on a more decisive role than before,” said Bank Austria economist Walter Pudschedl, describing the increasing importance of consumers. Thanks to the stabilisation of the labour market and the persistently positive development of income, private consumption will be the most important pillar of economic growth. Investment activity remains subdued amidst the unfavourable international environment, and foreign trade will only make a limited contribution to economic growth despite very robust development. This situation is expected to shift more towards foreign trade again in the second half of 2012. While the upward trend in private consumption will remain intact for the most part, a bit more support from foreign trade can be expected. Nevertheless, the outlook remains modest in an international environment that will only begin to ease very slowly. Investment activity will continue to be very moderate as well.

Decline in inflation has almost run its course
With the decline in inflation to 2.3 per cent year-on-year in April, the downward trend that started in December 2011 is gradually coming to an end. The hefty increases in crude oil prices over the past year will now increasingly drop out of the calculation of the inflation rate. In light of the fact that the price level for commodities will likely remain constant for the most part due to a lack of demand-side impulses at the global level, a stabilisation of inflation at a level around the 2 per cent mark is to be expected in the coming months. “We still expect an average inflation rate of 2.2 per cent in 2012. The moderate pace of growth this year should not give rise to any inflationary effects. In our opinion, the monetary policy measures of the ECB do not entail any obvious inflation risks, either,” said Pudschedl, analysing the development of inflation. Bank Austria’s economists expect the ECB’s key interest rate to remain stable in the coming months.
“In light of the relatively good start to the year characterised by a return to growth and the slight increase in the Bank Austria Business Indicator once again, we believe that our growth forecast of 0.8 per cent for 2012 is now even more secure,” said Bruckbauer. However, the latest data from the industrial sector and the new political distortions following the elections in Greece suggest that there is an increasing risk that the growth course Austria has set out upon could become even bumpier than was initially expected. The chances of a strong upturn in the recovery in the second half of the year have decreased. “The tightening of fiscal policy across Europe and the escalation of the recession in some EU peripheral countries could make the economic conditions for 2013 even more difficult than we had anticipated up to now. Although we are sticking to our growth forecast of 2.0 per cent for 2013, we see more and more downside risks,” said Bruckbauer, assessing the growth outlook for next year.

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