Bank Austria Business Indicator:
Austria on its way out of economic slump

  • Increasing signs of economic turnaround: Bank Austria Business Indicator climbs to minus 0.6 points in December, with improvements in all individual components
  • GDP contraction in final quarter of 2012, but economy will gradually gain momentum in 2013
  • Foreign trade and investment to drive recovery: economic growth to increase to 0.9 per cent in 2013 and 1.5 per cent in 2014
  • Risk focus to shift from Europe to emerging countries and the US
  • Protectionism and overregulation could stifle recovery
  • No key interest rate moves expected in 2013

At the beginning of the new year, the signs of an economic turnaround are becoming even clearer. "Following the stabilisation in recent months, the Bank Austria Business Indicator points to a burgeoning recovery in December, with an increase to minus 0.6 points. In a rare case of harmony, all components of the indicator showed improvement. The Austrian economy is on its way out of the economic slump," reported Stefan Bruckbauer, Bank Austria's chief economist. After several months of stagnation due to the challenging international environment, the economic situation in Austria is gradually starting to improve. As a result, the course appears to be set for higher growth in 2013 than in the previous year.

The current Business Indicator suggests that the Austrian economy has already passed the low point which resulted in a contraction in GDP in the fourth quarter of 2012. "According to our calculations, Austria's economic output declined slightly at the end of last year, with an estimated contraction of 0.1 per cent compared to the previous quarter. The trigger for this was the ailing export demand resulting from the escalation of the recession in key export markets for Austrian products," revealed Bank Austria economist Walter Pudschedl. The development of domestic demand was also restrained. Although private consumption was under pressure from the continued tension on the labour market, the most recent retail data showed at least a slight gain. The easing of the euro crisis has changed risk behaviour and should put a stop to the decline in investments.

An economic recovery is expected in the first quarter of 2013. The available leading indicators show that the Austrian economy is already growing again. Sentiment has brightened considerably among Austrian industrial companies, and positive signals from abroad have made a significant contribution to this improvement. The European industrial sentiment indicator weighted with Austrian export shares shows a clear upward trend. The business outlook is more optimistic than it was in autumn in all of the important export countries for Austrian industry. Although the conditions on the labour market deteriorated slightly again, sentiment among Austria's consumers improved somewhat around the turn of the year. "The majority of Austria's economic players are entering into the new year with a more optimistic attitude, and the improvement in the export-driven manufacturing sector in particular is fuelling expectations of a steady, albeit modest, recovery of the economy in the coming months. An increase in GDP is already to be expected in the first quarter of 2013, although it will only be by 0.1 per cent in quarter-on-quarter terms," said Pudschedl, summarising the current outlook.

"The gradual recovery of the domestic economy this year will be driven by two factors. We expect more robust foreign demand on the one hand and stronger investment activity on the other, and this will lift economic growth to 0.9 per cent in 2013," said Bruckbauer, providing an analysis of the anticipated developments. The economic recovery will start in the Asian emerging markets and the US and then spread to the European economy, which will also benefit from less restrictive budgetary policy than that seen in 2012. Italy and other countries have done their "budget homework" for the most part and will emerge from the recession around the middle of the year. As a result, demand for Austrian exports will be considerably higher in 2013 than it was last year. The easing of the situation in the Eurozone and the favourable financing conditions for investments will ensure that domestic demand gains momentum over the course of the year, as well. However, virtually no additional stimulus is to be expected from consumption. Although the wage agreements point to an increase in real purchasing power in 2013, the continued rise in unemployment will limit the upward trend.

Export demand will pick up even more in 2014, when the Eurozone economy will expand by 1.2 per cent after growing by just 0.1 per cent in 2013. Important export markets for Austria – primarily Italy but also Germany and France – will develop additional demand. Stronger impetus is also expected to come from the growth markets in Eastern Europe. Investment activity will be further expanded amidst the favourable conditions expected in 2014. The outlook for private consumption is also more favourable in light of a downward trend in inflation. In addition, a reversal of the trend on the labour market is to be expected in the second half of 2013, which, after an increase to 7.3 per cent in the average annual unemployment rate for 2013, will likely push the unemployment rate down to 7.1 per cent in 2014. "As of today, we expect GDP growth of 1.5 per cent in 2014 in light of the moderate improvement of the conditions in Austria," said Bruckbauer.

The positive economic signals seen in recent weeks make it less likely that the ECB will further loosen its conventional monetary policy reins by lowering the key interest rate to zero. At the same time, no interest rate hikes are to be expected for the time being due to the very gradual economic recovery in Europe. "We expect the ECB's key interest rate to still be at the current low of 0.25 per cent at the end of 2013. However, money market interest rates and long-term interest rates have likely bottomed out in Europe, although the upward potential will remain limited for the time being," said Bruckbauer.

The risks for the anticipated recovery scenario have shifted from Europe and the euro crisis to other locations. This very clearly includes the developments in the US. Aside from the fiscal cliff and the debt ceiling, the US, in contrast to the Eurozone, has not yet started to reform its public budget. "The budget consolidation that will be absolutely necessary in the US over the medium term and the development of countries like China, India and Brazil, which is apparently weaker than was expected even a short time ago, could have a considerable impact on the pace of the recovery. In any case, the risks for the global economy are clearly to be found outside of Europe at the moment," asserted Bruckbauer. However, this is based on the assumption that European leaders will not incorrectly interpret the positive signals being issued at the moment and will continue with the measures that have been initiated, particularly the banking union and the ECB's willingness to intervene. The danger of protectionism combined with regulation represents a significant risk in 2013 and beyond. After starting on the financial market, this trend is increasingly spreading to other sectors. With the lines being blurred between sensible regulation, populist activism and protectionist efforts, there is a risk that the budding economic recovery will be permanently stifled.

 charts (PDF; 44 KB)

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

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