Bank Austria Business Indicator:
Wait for the recovery continues

  • Bank Austria Business Indicator falls modestly in March, but remains in the black at 0.5 points
  • Improved consumer sentiment fails to compensate fully for lower confidence among producers
  • Inertia of Austrian economy will be overcome in second quarter as long as there are no further external interruptions
  • No trend reversal in sight on labour market in the current year: jobless rate in 2013 to rise to 7.5 percent
  • Inflation on the slide: average inflation will drop to at least 2.2 percent in 2013

Although economic activity has bottomed out, the recovery in the Austrian economy has yet to get underway. "After jumping into positive territory in the previous month, Bank Austria's Business Indicator bucked the upwards trend in March. The small decline to 0.5 points demonstrates that the expectations of a tangible revival in the Austrian economy in the course of the first quarter of 2013 were somewhat premature", said Bank Austria's chief economist Stefan Bruckbauer. The early signs at the start to the second quarter of 2013 have not been so great either, influenced by the renewed uncertainty in Europe following the less than optimal handling of the Cypriot crisis. "The sluggish development in components of Bank Austria's Business Indicator in March underlines that the economy is still playing a waiting game, but this is not dispelling hopes that an upwards trend will soon emerge", said Bruckbauer, cautiously optimistic.

The stagnation in Bank Austria's Business Indicator can be attributed to contrasting trends in producer and consumer sentiment at present. Irrespective of the dark clouds gathering over the labour market for months now, the sentiment among Austrian consumers continued to improve in March. Their outlook has steadily brightened since hitting a low in September, though consumer confidence is still well below its long-term average. This also applies to the sentiment among European businesses, where the weighted average of Austria's most important trading partner countries even deteriorated in March. This unfavourable influence exerted by European neighbours coupled with the weaker assessments of business in some overseas destinations of Austrian export companies have heightened the uncertainty of domestic producers and subdued the mood in Austria. "Overall, the modest decline came about because of the sentiment indicators included in Bank Austria's Business Indicator as the greater confidence exhibited by consumers was insufficient to compensate in full for the more subdued sentiment among businesses", explained Bank Austria economist Walter Pudschedl.

Alongside the sluggish sentiment indicators, the early leading indicators reveal that the recovery in the Austrian economy stalled in the first quarter of 2013 due to the re-emergence of uncertainty in Europe. Instead, the Austrian economy has moved to the brink of stagnation, especially because private consumption was unable to get going. The adverse trend on the labour market has had an impact, as demonstrated by the rather weak retail figures. Investment activity remained constrained in the current economic climate too. Only foreign trade managed to exert a very positive influence on the Austrian economy, whereby the tailwind was provided not so much by a pick-up in exports as the restrained development of imports. "Thanks to the modest support from foreign trade we expect to see a moderate increase in GDP in the first quarter by 0.1 percent qoq. This means the Austrian economy has made up for the decline in the closing quarter of 2012 and a recession is now no longer an issue", said Pudschedl.

The second quarter for the Austrian economy got off to a slower start than originally hoped as economic activity in Europe is still struggling. Even the most recent data, such as the Purchasing Managers' Index, has at best been a mixed bag, but generally weak. What is more, it implies yet another moderate decline in GDP in the countries of the eurozone, totalling 0.1 percent in 2013. That said, the signs of an – albeit hesitant – economic recovery taking root in the course of the year have not disappeared. The global economy is slowly getting into gear, driven by the emerging markets, above all China. In the meantime, Japan has also joined the camp of Asian economies that are pushing the global recovery forward. Alongside Asia, the US economy is another pillar of the global revival. Irrespective of the widespread worries that the phasing out of the wage tax cuts at the start of the year could weigh down on consumer expenditure, US consumers appear happy to spend. Additionally, the market of owner-occupied homes continues to recover and businesses are investing more again. Bank Austria's economists anticipate economic growth in the USA in 2013 will total almost 2 percent. Thanks to its production sector, which is extremely competitive on an international scale, Austria will benefit from the global recovery in demand throughout the next few months. Investments will also start to pick up going forward. "We assume that the Austrian economy will be able to post rather impressive growth rates in the second half of the year of around half a percent compared to the previous month. In spite of the subdued start to the year we are sticking by our forecast that economic growth in 2013 will be slightly higher than the previous year at 0.9 percent", said Bruckbauer.

Labour market under pressure
The sluggish recovery in economic activity is impacting on the assessment by Bank Austria's economists of trends on the Austrian labour market. The increase in employment since the middle of 2009 shuddered to a halt in the first quarter of 2013, while the seasonally adjusted jobless rate rose to an average of 7.4 percent. "We have been forced to abandon our assumption that the recovery will come early and be powerful enough to trigger a turnaround in labour market trends in the course of the current year. Consequently we have raised our unemployment projection from 7.3 to 7.5 percent", revealed Bruckbauer. This means the jobless rate in 2013 will be markedly higher than the 7.0 percent registered in the previous year, and reach its highest level in the recent past, even though we can expect modest annual average employment growth of approximately half a percent. We are not likely to see a reversal in the unemployment trend until 2014 when economic activity picks up some momentum again.

Inflation falls
The loose monetary policy of the European Central Bank and its range of special measures to overcome the euro crisis do not entail any inflationary risks according to the economists at Bank Austria. In fact, eurozone banks have already begun to repay their longer-term ECB refinancing. The strong increase in the loans and advances of the ECB to banks, which was largely seen as an inflation risk, is slowing down. The potential risk of the increased liquidity passing through into the real economy is declining. Additionally, the weak European economy is reining in inflation. Austria too has seen a reduction in inflation since the start of 2013. "After 2.8 percent compared to the previous year at the end of 2012, modest price increases with commodities, especially crude, brought about a reduction in average inflation to 2.5 percent in the first quarter of 2013. And with economic activity remaining weak, the trend for the coming months points downwards. We still assume that annual average inflation in 2013 will drop to 2.2 percent, but at the same time we reckon it is increasingly likely the actual figure could be even lower", said Bruckbauer. Inflation will certainly not be the defining topic of economic policy this year. Instead, discussions are much more likely to revolve around a possible risk of deflation, as in times of weak demand influenced by unfavourable labour market trends and fierce competition, business-owners have to be very careful about price hikes.

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