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Bank Austria Business Indicator:
Modest economic spring with upward potential

  • Bank Austria Business Indicator for February confirms that the economic turnaround has already begun: second increase in a row to 0.2 points
  • Average annual inflation expected to fall to 2.2 per cent
  • Risks from commodity prices and "implementation errors" by European policymakers
  • Optimistic outlook: Austria could achieve 2 per cent growth starting in the summer

Towards the end of the winter, the Austrian economy caught the scent of spring again. "The Bank Austria Business Indicator increased for the second month in a row in February and has now clearly settled in positive territory. With its current reading of just 0.2 points, the indicator is still pointing to a modest upswing for Austria's economy," said Bank Austria's chief economist Stefan Bruckbauer, analysing the latest results. Following the slight economic slump in the second half of 2011 and the stabilisation towards the end of the year, the already improving sentiment will increasingly start to be reflected in the real figures, but Austria's economy still has a few months of mixed developments ahead of it.

The latest improvement in the economic climate gives cause for cautious optimism, although it was solely the result of industrial sentiment: "Austrian manufacturers are going into the spring with more confidence on the back of a tangible easing of the situation with regard to the European economy due to the concerted measures aimed at solving the sovereign debt crisis. Over the past ten years, the European industrial sentiment indicator weighted with Austrian foreign trade has never increased as much compared to the previous month as it did this February," said Bruckbauer. Consumer sentiment in Austria has stabilised further. The negative effects of the Austrian budget reform package appear to have been in line with consumers' expectations and did not further cloud consumer sentiment.

"In addition to the improved sentiment indicators, leading indicators such as order trends and labour market developments suggest that the Austrian economy is growing again following the slight downturn in the fourth quarter of 2011. In the coming months, the emerging economic spring will remain quite subdued, while very divergent real data releases will lead to constant ups and downs with regard to sentiment," said Bank Austria economist Walter Pudschedl. The much needed support from abroad will remain reserved and volatile for the time being, and domestic demand is being dampened by the stricter budgetary policy in the public sector and the risk factors at the European level. Particularly in the soon-to-be-completed first quarter of 2012, the existing stress factors will allow the Austrian economy to achieve only a very low growth rate of 0.1 per cent in quarter-on-quarter terms – assuming it grows at all. Economic conditions will gradually stabilise towards the middle of the year, and the growth trend in Austria will start to solidify. More support can be expected from all of the demand components in the second half of the year. Foreign trade will strengthen once again and offer stable support for the Austrian economy. Domestic demand will stabilise as well, thanks in large part to the central bank's monetary policy characterised by increased liquidity and low interest rates. Considering all of these factors, we are upholding our moderate growth forecast of 0.8 per cent for 2012 as a whole.

One risk factor for our economic scenario is the development of inflation. While Bank Austria's economists do not expect any inflation to emerge from the economy itself due to the slow pace of growth, it is possible that rising commodity prices could have a negative impact on economic developments, as was the case last year. In our base assumption, oil prices will remain at the high levels seen in recent weeks. In light of the existing demand constellations and political uncertainties, we do not expect to see a decline. Therefore, oil prices will not negatively influence Austria's economy according to our calculations. Overall, we also expect annual average inflation to decline slightly from last year's relatively high level of 3.3 per cent to 2.2 per cent in 2012. If, however, oil prices and other commodity prices rise considerably due to the tensions in the Middle East, this could have a negative impact on the global economy and, in turn, the Austrian economy. "If commodity prices were to increase by 20 per cent, this would reduce economic growth by around a quarter of a percentage point," said Pudschedl.

The risks related to the European government debt crisis have diminished considerably in recent weeks. The handling of the Greek debt restructuring, the approval of the second aid package for Greece and the formal adoption of the reform package went off without any major problems. The ECB was also successful in the implementation of its monetary policy objectives and was able to make an important contribution to improving the flow of liquidity within the Eurozone. According to Bank Austria's economists, all of these developments will lead to a further improvement of the economic environment in the coming months. "Thanks to the easing of the situation surrounding the euro crisis in recent weeks, Austria could once again see economic growth of roughly 2 per cent starting in the summer," said Bruckbauer optimistically. However, there are still several risks to this scenario. On the one hand, there may be difficulties in implementing the reform package, which would drag down sentiment at least over the short term, and on the other, tensions within the ESCB have come to light recently, which could have a negative influence on the credibility of the ECB and thus on its capacity to act. Therefore, the risks to the recovery are once again largely dependent on policymakers in 2012.

 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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