Bank Austria Business Indicator:
Recovery around the corner

  • Problems such as the Cyprus crisis hurting sentiment among Austria’s manufacturers and consumers in April
  • This temporary sentiment outlier reflected in the Bank Austria Business Indicator, which fell to last year’s level in April
  • Improved business outlook likely in the next survey, as negative extraordinary effects have since dissipated
  • GDP growth weaker than projected for 2013, but improvement in sight: encouraging signals for a moderate recovery in the second half coming from abroad
  • Inflation to fall below 2 per cent in the first half of the year

The expected recovery of the domestic economy failed to materialise in the first quarter of 2013, and the troubling conditions have persisted into the beginning of the second quarter. “The Bank Austria Business Indicator was unable to continue the encouraging trend from the past months, and in April fell back to its level from the start of the year. After two months in positive territory, it slipped back to minus 0.1 points at the beginning of the second quarter,” said Bank Austria’s chief economist Stefan Bruckbauer. But the current decline in the Bank Austria Business Indicator is a temporary outlier, and should not be given too much weight. “The sentiment components in the indicator were affected by new uncertainty in Europe, especially the crisis in Cyprus,” Bruckbauer said. He added, “But these factors have since been resolved, so the business outlook will be better in the coming surveys.”

The change in the Bank Austria Business Indicator in April was driven by a uniform and clear decline of all subcomponents. “At the beginning of April, sentiment worsened among Austrian consumers, and also among Austrian manufacturers due to the difficult conditions in the European economy. Expectations are currently roughly as guarded as they were at the beginning of the year,” Bank Austria economist Walter Pudschedl summarised. The difficult conditions on the labour market are causing worries among Austrian consumers, even though the jobless rate of 4.7 per cent is still the lowest in Europe. The uncertainty in connection with the failure to find a solid solution to the Cyprus crisis and the arduous government formation process in Italy also hurt sentiment at least in April, especially in industry.

“After the weak development at the beginning of the year, the economy will continue to flag in the second quarter of 2013. Investment activity and consumption are poor under the current conditions, and domestic demand remains the Achilles heel of the Austrian economy,” Pudschedl said. Companies are postponing investments in expansions due to the prevailing uncertainty. And private consumption is being hurt by the unfavourable conditions on the labour market. Foreign trade will offset these trends to a certain extent in the coming months. Exports will only grow moderately because of the soft economy in many European countries. At the same time, import demand will grow more weakly due to lower commodity prices, allowing foreign trade to make a positive contribution to economic growth in the second quarter. “In light of the continued low level of domestic demand, our original projection of 0.5 per cent quarter-on-quarter economic growth for the second quarter of 2013 has proven to be too optimistic. Now, we are expecting GDP to expand by no more than roughly 0.2 per cent,” Bruckbauer stressed.

Moderate global economic recovery will spread to Austria
With signs of a coming economic upswing increasing over the past weeks, the Austrian economy is expected to see improvement in the second half of the year. A look at the Q1 GDP figures that have already been released, with strong numbers from the USA and Britain and high growth in China and other Asian markets, shows that the moderate recovery of the global economy is continuing. Signs of economic stabilisation in the European Union are also increasing, though some countries such as Italy and France are still facing headwinds. But the economic locomotive Germany seems to be slowly picking up speed based on the most recent industrial production and order book statistics. “The chances are good that the Austrian economy will see a late economic spring in the second half of the year with support from abroad, and that this will offset the weaker development over the past months to a certain extent. Nevertheless, we have slightly lowered our projection for 2013 to 0.7 per cent. In 2014, Austria’s economy should grow by a much stronger 1.6 per cent,” Bruckbauer said.

No further rate cuts expected from the European Central Bank
In light of the weak economy, rising unemployment and low level of new lending in Europe, the European Central Bank (ECB) cut its key interest rate by 25 basis points in May. “The ECB’s cut to 0.5 per cent came a little earlier than we thought, but the extent was as we projected. The central bank also announced that it is prepared to make a further interest rate cut. In light of the limited effect that conventional monetary policy measures are having under the current conditions, we do not assume that this will happen, and expect that the key interest rate will remain unchanged until the end of 2013,” Bruckbauer noted. The positive signals in connection with the implementation of the banking union are more important, and will improve sentiment in Europe and should also lead to an increase in lending by the end of the year at the latest. “The positive impetus that the banking union will likely bring for the Eurozone economy is underestimated by many,” Bruckbauer stressed.

The average year-on-year inflation rate in the Eurozone fell to 1.2 per cent in April. Inflation is significantly higher in Austria, but is also declining thanks to decreasing commodity prices. The inflation rate will fall below the 2 per cent mark over the course of the second quarter of 2013. After an average rate of 2.5 per cent in the first quarter, this increases the chances that the annual inflation rate for Austria in 2013 will not be higher than 2 per cent.

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