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16.07.2012

Bank Austria Business Indicator:
Headwinds from Europe hindering Austrian economy

  • Bank Austria Business Indicator falls for the first time in half a year to stagnation level
  • Further slowing of growth in the second quarter, with a GDP increase of 0.2 per cent, and even less momentum at the start of the second half of 2012
  • But: Slight corrections in austerity programmes, weaker euro and lower oil prices indicate an economic stabilisation in late 2012
  • Unchanged forecast for GDP growth: 0.8 per cent in 2012 and 1.5 per cent in 2013
  • Inflation rose slightly by 2.2 per cent in June, but annual average of 2.0 per cent is still expected for 2012

The storm clouds in the Austrian economic sky have grown even darker in recent weeks. “After five consecutive increases, the Bank Austria Business Indicator posted a significant decline in June. The slide to a value of exactly zero indicates that the economy will approach stagnation in the very near future,” explained Stefan Bruckbauer, chief economist at Bank Austria. The domestic economy is starting to feel the direct impact of the deterioration of conditions in Europe as a result of its strong trade ties with the region. After all, 70 per cent of the goods exported by Austria are received by members of the European Union.

"The latest decline in the Bank Austria Business Indicator is due to the considerable worsening of business prospects in Europe, which is taking its toll on the sentiment of Austria’s industry and also consumers," said Walter Pudschedl, an economist at Bank Austria. In two-thirds of the countries in the Eurozone, which receive over 80 per cent of Austrian exports to the region, industrial sentiment deteriorated again in June. The negative developments have substantially lowered the confidence of Austria’s industry, although sentiment in the sector is still above average by international standards. In addition, Austrian consumers are becoming increasingly worried about the future. The escalation of the euro crisis and the weaker labour market data that recently reappeared are weighing down consumer sentiment.

Following the quite positive start to the year, with 0.3 per cent economic growth compared to the previous quarter, the current lead indicators for the second quarter show a slowdown in growth. "Despite the negative conditions in Europe, we feel that the Austrian economy remained on track for growth in the second quarter. However, with an increase of 0.2 per cent compared to the previous quarter, the estimated increase in GDP was below the level from the beginning of the year," said Pudschedl. Besides stable consumption development, foreign trade was once again a key source of support, although this was less a result of export growth and more due to the low level of import growth caused by lower commodity prices.

The current sentiment will create a very unfavourable situation when it comes to economic development in the second half of 2012. In particular, investment growth is suffering and will only allow for a very slow pace of general economic development for the time being. Nevertheless, the recently more favourable industrial data and the improvement in several forward-looking indicators in the Eurozone point to at least a slowdown in the pace of the recession in the Eurozone and perhaps even a stabilisation of the economy. "The headwinds from Europe are still slowing down the domestic economy. However, the positive effects of the somewhat looser fiscal policy, the ongoing weakening of the euro exchange rate and the somewhat lower oil prices may become apparent in 2013. We still expect an increase in GDP of 0.8 per cent for 2012 as a whole and economic growth of 1.5 per cent in 2013," said Bruckbauer. However, this is all based on the assumption that constructive work will continue in the Eurozone on the solutions that have been introduced to overcome the euro crisis. "Uncertainties about the necessary restructuring of the Eurozone still pose the greatest risk for future economic development in Austria," said Bruckbauer.

Commodity prices determine inflation trend
Despite a slight increase in inflation to 2.2 per cent in annual comparison in June, the downward inflation trend, which has persisted since the autumn of 2011 and is a result of the moderate commodity price trend, will continue. The average inflation rate for the first half of 2012 was 2.4 per cent. "Following the favourable inflation trend that lasted for the first six months, we expect inflation to come in just under 2 per cent in the second half of 2012 despite the slight increase to 2.2 per cent in June. The annual average for 2012 should therefore be 2.0 per cent, and we expect inflation to fall below the 2-per cent mark in 2013 and come in at 1.8 per cent," said Bruckbauer. However, according to the economists at Bank Austria, the strong increase in commodity prices in recent weeks will soon prevent a further decline in inflation. Agricultural commodities have seen the largest price increases since the beginning of June, with maize taking the lead at an increase of 30 per cent. While the prices for metals remained practically unchanged, oil prices recently rose again. From the annual low of just over USD 90 per barrel at the end of June, the price of oil temporarily exceeded USD 100 again, but is still far from the annual high of USD 125.

Unlike in recent weeks, when the focus was mainly on agricultural commodities, inflation is expected to hit precious metals and energy in the second half of the year due to the considerable risks on the supply side. These include growing tensions in the Middle East following the start of the oil embargo against Iran on 1 July and the ongoing hurricane season in the US. However, due to the large inventories in the industrialised countries, the upside risks are limited, which means that inflation should stay in check in the months to come.

 charts (PDF; 107 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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