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Austrian Economy Cooling Down Rapidly

Published: October 15, 2011; 17:40 · (Vindobona)

Drastic deterioration in industrial climate and consumer sentiment point to a break in the economic recovery in the second half of 2011.Economic outlook for 2012 lowered to just 1.4 per cent.

Austrian Economy Cooling Down Rapidly / Picture: © Vindobona.org

The economic recovery, which proved to be stable and robust in the first half of 2011, is now faltering at the end of the summer. After a solid reading of 2.5 points the previous month, the Bank Austria Business Indicator fell to 1.5 points in August. The Austrian economy is starting to show acute signs of deterioration.

The early indicator, which is based on sentiment and bank market data, recently fell to the lowest level since February 2010. The one-point slide is the sharpest drop since the autumn of 2008, when the US financial crisis spilled over to Austria’s real economy.

The uncertainty on the markets is being increasingly reflected in consumer sentiment. The mood of consumers has darkened all over Europe, and the optimism that had prevailed in Austria in recent months is already a thing of the past. However, consumer confidence is still slightly above the long-term average at least. In contrast, sentiment among Austrian industrial companies has fallen slightly below the average.

The deteriorating order situation and negative signals from other countries put a major damper on sentiment. Economic players’ assessment of the business outlook for the most important export markets for Austrian industry was much less favorable in August. The sentiment index for European industry weighted for Austria’s share in trade posted the sharpest drop since the autumn of 2008 and fell to the lowest value since the beginning of 2010. Sentiment among consumers and in industry has deteriorated at a record pace in recent weeks on the back of increasing risks and growing uncertainty. There are currently no real signs of an end to this downward trend.

The global environment has deteriorated drastically within just a few weeks and is now rapidly putting the brakes on the robust recovery of the Austrian economy seen in the first half of 2011. The export-oriented industrial sector is increasingly suffering from a lack of new orders on both the domestic and foreign markets. Production growth has been stagnating since the beginning of the summer, and output has even started to decline slightly. Falling demand has already had a negative impact on the most recent foreign trade data. The export industry is not the only area that is running out of steam. Domestic demand has also come to a virtual standstill. Now that inventories have been restocked again and the replacement investments that had long been delayed during the crisis have been made, investment activity is losing its most important drivers for the coming months. In light of the elevated risks to global growth and the expansion investments, which would be essential to keep investment activity in gear. In addition, private consumption will continue to maintain only a moderate upward trend. The commodities-driven increase in inflation has impacted the development of real income significantly, and the positive labor market trends that have been supportive up to now are showing clear signs of sluggishness. Employment growth started to slow over the summer, and the jobless rate is even experiencing a slight upward trend at the moment.

Added to this is the strong uncertainty surrounding the debt crisis in some Eurozone countries and the impending prospect of stricter fiscal discipline in the public sector. All of these factors will severely limit consumer demand in the coming months.

Following the strong first half-year, the economic recovery in Austria will take a breather in the second half of 2011. At the moment, Bank Austria expects growth rates of around 0.2 per cent in quarter-on-quarter terms in the third and fourth quarters of 2011. Based on the available leading indicators, however, there is even a risk that the upward trend will come to a complete standstill at times. Despite the weak second half of the year, the analysts believe that the Austrian economy will still show strong signs of life, delivering the highest economic growth since 2007. Due to the very robust economic recovery up until the middle of the year, Bank Austria has lifted the growth forecast for 2011 as a whole to 3.3 per cent despite the less than promising outlook for the second half of the year. According to these estimates, the Austrian economy will turn in one of the highest growth rates in all of Europe.

The sharp decline in the Bank Austria Business Indicator points to a noticeable slowdown in the economy that will last at least until the end of 2011 or the beginning of 2012. In addition, the global debt reduction efforts and the unresolved debt crisis combined with the very volatile market developments caused by persistently high levels of uncertainty, diminishing confidence among economic players and the fact that the economic policy options have largely been exhausted will also limit the growth outlook. The recovery will progress at a very hesitant pace over the course of 2012. The increased economic risks still point downward, but another recession is not expected. Based on the indications of much less favorable conditions, however, the analysts have lowered the GDP forecast for 2012 from 1.8 per cent to just 1.4 per cent. The growth scenario is based on the assumption that the individual Eurozone countries will at least start to implement visible structural reforms that will allow for sustainable growth on a solid foundation.

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