Annual Financial Statements 2008 of Bank Austria

Outlook
Economic environment
� The global economy is in deep recession. After growth of 5 % in
2007 and over 3 % in 2008, world GDP (at purchasing power parities)
will stagnate for the first time in the post-war period. Economic
growth in China and in the Asian emerging markets is expected to
reach 5.5 % and 5 %, respectively, which is a serious setback for
these countries. The US economy has shown a downward trend since
the end of 2007; recent indicators confirm that it continues to shrink,
despite unprecedented rescue and support programmes. Economic
performance in the euro area will decline by 2.3 % in 2009, a
development which also reflects the repercussions of the oil-price
hike and the euro’s strength until summer 2008. At the beginning of
2009, the synchronous global downturn in manufacturing seen in the
final quarter of 2008 is spilling over from key industries to all sectors
of the economy, via demand for capital goods, employment, incomes
and demand for consumer goods. It is not yet possible to say how far
this development has progressed and at what point we are now. And
it is not clear for how long we will have to expect further adverse
impacts and valuation losses in financial markets. One of the few
positive factors in this scenario is the pragmatic approach taken by
economic policymakers and their readiness to intervene.
� The Austrian economy felt the full impact of the global economic
downturn around the turn of the year, with some time lag. The rate of
growth in Q4 2008 compared with the preceding quarter was negative,
at – 0.2 %, for the first time since the beginning of 2001. For the
first quarter of 2009 we expect GDP to shrink by at least 1%. The volume
of orders from abroad has fallen, which means that the first few
months of 2009 may see a double-digit drop in exports compared
with the previous year. Investment activity is also being reduced in
view of the unfavourable international environment. We assume that
Austria’s economic performance in 2009 will decline by 1.6 %, after
GDP growth of 1.8 % in 2008. While there are currently no signs of a
turnaround, we expect that economic activity will recover slightly towards
the end of 2009. Next year may see moderate growth of 0.7 %.
This scenario is based on hopes that the ECB, which has already
eased its monetary policy, will continue to pursue this course with all
instruments currently available or yet to be created, and that the Austrian
government’s economic stimulus package will start to have tangible
effects as the year progresses. The risk of an even sharper
downturn is still higher than any risk of inflation.
For the banking sector this means that the trends recorded in credit
demand and savings deposits in the last few months of 2008 will intensify
in 2009. Credit demand will lose momentum and there will be
a shift from medium-term and long-term loans for investment projects
to short-term loans. We assume that lending volume will decline
due to lower demand. Bank deposits will grow at a slightly lower rate
than in 2008, with the inflow of deposits from the business sector
slowing down. As incomes grow more slowly and public awareness of
the recession rises, the already high savings ratio will increase further,
from 12.3 % to 13.1 % in 2009. Given the uncertain market outlook,
holdings of financial assets will continue to focus on short-term bank
deposits and especially top-quality bond issues, entailing further
structural adjustments in the area of mutual funds.
� For 2009 we forecast a 0.8 % contraction of GDP for the entire
CEE region, with major countries falling into recession. This development
in Central European countries like Poland, the Czech Republic,
Slovakia and Slovenia, which have been characterised by a relatively
sound macroeconomic environment, will be driven mainly by a slowdown
in external demand. South-East European countries, the Baltics
and Hungary will have to cope with domestic weaknesses in addition
to the global slowdown – i.e. high current account deficits and
external indebtedness – which in the current environment further
bleakens their short-term prospects as external financing is difficult
to obtain and rather expensive. Kazakhstan, Russia and Ukraine
will be affected by a lack of external funding, as well as by a fall in
commodities prices due to the first two economies’ dependence on
energy production and on Ukraine’s reliance on steel.
In the current environment the key consideration is continuity in the
financing cycle. In past years, consumption and investment growth
were mainly financed through local bank loans to households and the
corporate sector. Apart from macroeconomic factors, the local banking
sectors differ in their external financing needs and the respective
level of foreign exchange lending. Several measures have already
been implemented by local governments and national banks, as well
as by international institutions, in order to restore external and internal
confidence in banks (e.g. by introducing deposit guarantee schemes),
inject liquidity into the banking system and support economic growth.
This is especially the case in Russia and Kazakhstan, where major
initiatives have been taken by the local governments to support the
banking sector, and in Ukraine, Hungary and Latvia, where the IMF’s
intervention has also been required.
Bank Austria · Annual Financial Statements 2008
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