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Bank Austria Business Indicator:
Austrian economy at a standstill – but probably not for long

  • Bank Austria's Business Indicator sinks to -0.7 points in August, the third decline in a row
  • Conditions tightening on labour market casts shadow over consumer sentiment, but industry confidence stabilises again
  • Economic growth for 2012 as a whole expected to be up to 1 percent, in spite of stalled economic activity in the second half of the year
  • Positive outlook for 2013: laying foundations for solution to euro crisis should boost chances of more dynamic GDP growth with an increase of 1.2 percent
  • Inflation: in spite of pressure from oil and food prices, inflation rate hovering at 2 percent for 2012, no increase in sight for 2013 either

The cooling of the international economic climate and the ongoing recession in some countries around Europe are increasingly afflicting the Austrian economy. "The August reading of the Bank Austria Business Indicator sank visibly compared to the previous month to just -0.7 points. This means the indicator has been negative for three months in a row", says Stefan Bruckbauer, chief economist at Bank Austria. After some shallow economic development recently, the clouds really began to gather over the Austrian economy again at the end of the summer. "The Austrian economy has now fallen off its growth trajectory from past quarters. The tricky international conditions continue to weigh down on developments in Austria, meaning the best-case scenario in the coming months is that economic activity will stagnate", continued Bruckbauer.

The deterioration in the sentiment among Austrian consumers was instrumental in the now much gloomier economic prospects in comparison to the previous months. Although consumers in Austria are still essentially much more optimistic than in most other European countries, the latest downturn in conditions on the labour market with rising unemployment and now stagnating employment levels are obviously having an effect in Austria too. By contrast, the mood among manufacturers across Europe has already hit rock bottom and is now brightening up. In what are the main European sales markets for Austrian companies, industrial confidence weighted with Austria's share of foreign trade has even improved slightly. Consequently, Austrian manufacturers are now also looking more positively to the coming months. "The current sentiment, which is unmistakably shaping the path of the business indicator, clearly illustrates that competitive Austrian industrial companies are also holding their own well in a very challenging European environment. The uncertainty surrounding the euro crisis is prompting private consumers to be more cautious, which is therefore resulting in more subdued consumer behaviour. Of course, this is having a knock-on effect on economic growth", said Bank Austria economist Walter Pudschedl, analysing the situation.

Given the general conditions at present, the economists at Bank Austria do not anticipate there will be any economic growth in Austria in the third quarter of 2012. In fact, the early indicators coming in even point towards a higher risk of a slight contraction in economic development in the autumn. The decision by the ECB to purchase government bonds, the green light given by the German Constitutional Court for the ESM and the measures adopted for a European banking supervision framework all represent concrete progress towards solving the euro crisis. This will positively influence the sentiment in the coming months and thereby lay the foundations for a reversal of the current economic growth trend. What is more, the somewhat weaker euro towards the end of the year in comparison to 2011 will support the Austrian economy, even though there are not likely to be any significant boosts to growth for the time being. Austria should avoid another recession, but in the eurozone, economic output is expected to contract both in the third and in the fourth quarter of 2012. This means the eurozone will register a 0.5% decline in GDP for 2012 as a whole.

Thanks to the powerful upturn in growth at the start of the year, the Austrian economy will expand moderately throughout 2012 as a whole, in spite of stalling in the second half of the year. This is also helped by the relatively favourable development in the manufacturing sector, which despite signs of weakness has proved to be amazingly stable in what is a very challenging international environment. "We stick by our optimistic growth assessment of up to 1 percent for 2012, even though the latest indicators suggest that the risk of falling short of this target has risen", said Bruckbauer. It is still possible that the Austrian economy will be able to return to a more buoyant growth path in the coming year. "For 2013 we anticipate an increase in GDP of 1.2 percent as we reckon the foundations are now being laid for a successful resolution to the euro crisis, and the markets, notwithstanding any volatility, will gradually calm down", explained Bruckbauer optimistically.

Inflation remains low
In August the higher prices of oil and food coupled with the weaker euro brought an end to the declining inflation trend we have seen since late 2011. Compared to the previous year, inflation reached 2.2 percent. This meant the rate of inflation dropped on average between January and August to 2.4 percent, after averaging out at 3.3 percent in 2011. "We assume that inflation in the coming months will sink below the 2 percent mark, even though the declining trend is likely to be less marked than previously assumed due to the upward trend in commodity prices and the weaker euro exchange rate. Inflation over 2012 as a whole will come in at just above 2 percent", said Bruckbauer. The slack economic activity means inflation will not be subject to any upside risks from the economy in the near future, while the economists at Bank Austria do not expect to see any adverse consequences arising from the monetary policy measures of the European Central Bank either. The new programme launched by the ECB to buy up government bonds will not increase the amount of money in circulation as the bond purchases are neutralised. "We assume that the ECB will succeed in draining liquidity in time once the economy has found its feet again and therefore the threat of inflation has passed. For 2013 we expect to see inflation fall to an annual average of 1.9 percent", concluded Bruckbauer. The rather mild economic growth means there is no demand-pull inflation on the horizon. The increase in commodity prices is also likely to be subdued on account of the global slowdown in economic activity, thereby constituting a limited upside risk. Once the euro crisis calms down the euro exchange rate will consolidate again, and hence be able to support stable price trends once more.

 charts (PDF; 100 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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