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16.01.2012

Bank Austria Business Indicator:
Stabilisation to start off the year

  • Bank Austria Business Indicator unchanged at minus 0.5 points in December, as economic sentiment stabilises
  • After stagnating at the end of the year, Austria's economic output will only slightly increase in the first quarter of 2012
  • Subdued domestic demand and weak foreign demand to hinder GDP growth in the initial months of 2012
  • No fears about 2012, but growth prospects are moderate, with expectations of only a 0.8 per cent increase in GDP
  • Weaker euro dampens burgeoning inflationary easing – however, inflation will drop to 2.2 per cent in 2012 following 3.3 per cent in 2011

The economic situation in Austria started to stabilise around the turn of the year. "Following a substantial downward trend that started in the spring of 2011, the Bank Austria Business Indicator did not deteriorate further compared to the previous month in December. At minus 0.5 points, however, our indicator suggests that Austria's economic development will be very subdued in the initial months of the new year," said Stefan Bruckbauer, Bank Austria's chief economist, analysing the most recent Business Indicator. However, the latest data indicate that the economic slowdown will likely be relatively moderate in Austria. It appears that a major economic downturn is not looming in the offing.

The improved sentiment among Austrian industrial companies in particular points to an end of the downward trend in the Austrian economy. Confidence is higher than it has been since the summer of 2011 following an improvement in the business prospects for Europe. In fact, the sentiment index for European industry weighted for Austria's share in trade increased slightly in December. "While sentiment in industry improved in December, Austrian consumers lost confidence in comparison to the previous month," reported Bank Austria economist Walter Pudschedl. Although Austrian consumers are somewhat more pessimistic about the future, they are still more optimistic than their counterparts in the rest of Europe. Concerns about additional financial burdens as a result of stricter fiscal policy as well as the reversal on the labour market, which has caused unemployment to increase several months in a row, are dragging sentiment down.

According to Bank Austria's economists, the weaker growth in foreign demand caused Austria's economy to stagnate in the final quarter of 2011. Nevertheless, GDP increased by 3.3 per cent in 2011 as a whole following economic growth of over 4 per cent in the first half of the year. "In the initial months of the current year, economic development will continue to be hindered by the persistent restraint on the export market and rather lacklustre domestic demand. Therefore, we believe that Austria's economic output will increase only slightly in the first quarter of 2012," said Pudschedl.

Despite the less than encouraging start to the year 2012, there is no reason to harbour fears about the economic developments in 2012. "The prospects are good that the global economy will strengthen again over the course of the year and I, for one, am convinced that the European crisis of confidence can be resolved," said Bruckbauer optimistically. The year 2012 will not provide us with a secret weapon that can solve Europe's problems in a single stroke. The gradual implementation of the coordinated fiscal policy measures, closer cooperation between the Eurozone countries where it is needed and – above all – intelligent monetary policy on the part of the ECB will slowly but surely allow the confidence in the European economy to return. This will then convince the investors and the rating agencies as well. The delay of investment and consumer decisions will then start diminish, and domestic demand will start to gain momentum again. "There is certainly no reason for panic about 2012, even after the recent downgrading of the majority of the Eurozone countries. We can't expect too much from the new year, because the pressure to reduce public debt will continue to hinder Austria's economic growth. Therefore, we expect only a moderate growth rate of 0.8 per cent for 2012," reported Bruckbauer.

Euro exchange rate puts the brakes on downward trend in inflation
"The decline in annual inflation, which saw inflation fall to 3.2 per cent in December 2011, will continue in the coming months. Following an inflation rate of 3.3 per cent last year, we expect an annual average of just 2.2 per cent in 2012," said Bruckbauer. The easing of inflation has been caused by the elimination of the significant increases in oil prices seen in 2010 from the calculation basis, but is currently progressing more slowly than was initially anticipated. On one hand, the global economic forces are sufficient to drive up commodity prices, and especially oil prices, in 2012. After an average price of roughly USD 112 per barrel in 2011, a new record price of USD 120 is expected in 2012. On the other hand, the role of the euro-US dollar exchange rate should not be underestimated when it comes to the effects of commodity trends on domestic inflation. Due to the prevailing uncertainty, the economists at Bank Austria expect the euro to weaken against the US dollar by roughly 10 per cent by the end of 2012. In addition, second-round effects from the high price growth in 2011 will cause considerable inflationary pressure at the beginning of 2012, and additional driving effects could later result from fiscal policy measures that are still being prepared. Nevertheless, Bank Austria's economists believe that inflation will remain low over the medium term.

 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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