The Austrian economy has been shrinking for more than a year

The Austrian economy has been shrinking for more than a year
ECB members warn against hopes of interest rate cuts.

Domestic economic output fell again in the third quarter. It fell by 0.6 percent compared to the second quarter, according to a quick estimate by the economic research institute Wifo.

Accordingly, there is a persistent decline in the industrial and construction sectors. In industry, value added fell by 0.5 percent in the third quarter, after minus 0.8 percent in the previous quarter. In the construction industry, Wifo economists recorded a decline of 1.8 percent – after minus 1.3 percent in the months of April to June.

But the one percent weaker consumer demand from private households also had a negative impact, it is said. And government consumer spending also fell by 1.3 percent in the third quarter, after rising by 1.5 percent in the previous quarter. And according to Wifo, the 2.4 percent increase in exports could be a shift effect, as exports fell significantly in the previous quarter.

Based on the flash estimate, economists assume that this will be the fifth consecutive quarter of stagnating or declining economic performance.

Will interest rates fall sooner?

Despite these weak figures and pessimistic economic forecasts, there are unlikely to be any interest rate cuts in the foreseeable future. Inflation rates are falling significantly in many European countries, but speculation about rapid interest rate cuts is premature, say leading representatives of the European Central Bank. The ECB will have to stay at the interest rate peak in the next few quarters, said Slovakia’s chief monetary watchdog, Peter Kazimir, on Monday in an article on the website of his national central bank. “Bets on interest rate cuts as early as the first half of next year are completely misguided,” he explained. Lithuania’s central bank chief Gediminas Simkus made similar comments. “I would be surprised if we had to cut interest rates in the first half of next year,” he said.

However, the prices on the money market currently show that some investors are already speculating on the first interest rate cuts by the end of June 2024. The ECB decided on Thursday at its external interest rate meeting in Athens to take a break from interest rates in view of the weakening economy and declining inflation figures.

The latest forecasts for the global economy are for modest growth. The forecast by the International Financial Forum, which is currently meeting in Guangzhou, China, assumes global economic growth of 3.1 percent, which corresponds to a significant slowdown.

It is said that the central banks’ tightening of monetary policy, the war in Ukraine and the effects of the Covid pandemic are having a slowing effect on economic development. In addition, core inflation is still well above the central bank targets. This in turn speaks against an imminent interest rate cut.

Positive signal, but…

On the other hand, positive signals come from Germany. Inflation there has fallen well below four percent for a long time. This is the lowest value since August 2021.

The euro exchange rate reacts positively to this news. However, German analysts warn against getting too excited. The overall picture does not change, writes analyst Jens-Oliver Niklasch from Landesbank Baden-Württemberg. “Germany’s economy is more or less standing still.” The balance sheet is likely to be similar in the final quarter of 2023. Only afterward can one become a little more confident. Overall, the downside risks to the economy currently predominate.

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