High Interest Rates Weigh on the Business Cycle

WIFO Business Cycle Report of March 2024
After temporarily stabilising around the turn of the year, the WIFO Business Cycle Index fell slightly again in February. In manufacturing, which is the main drivers of the business cycle, companies' assessments of the current situation and their expectations worsened. Economic sentiment in Germany also deteriorated further.

"The high interest rates and difficult access to mortgage loans have slashed credit demand growth in Austria. The KIM regulation which tightens credit standards for mortgages represents an additional hurdle," says Marcus Scheiblecker, author of the latest WIFO Business Cycle Report.

The economic slump in Austria prevailing since the third quarter of 2022, has been interrupted so far only once by a slight increase in economic output at the beginning of 2023. The sharpest decline was observed in the second quarter of 2023 (GDP –1.3 percent in real terms compared to the previous quarter). GDP contracted again in the third quarter of 2023. Statistics Austria calculated stagnation for the fourth quarter.

In February 2024, Austrian companies' economic assessments continued to deteriorate (according to the WIFO-Konjunkturtest – business cycle survey), both with regard to the current economic situation and expectations for the coming months. Although, the surveys of the previous months had suggested a bottoming out at a low level.

The situation in Germany is similarly unfavourable to that in Austria. GDP there fell by 0.3 percent (in volume terms) in the fourth quarter of 2023 after stagnating in the previous quarter. Business sentiment is also subdued.

The business cycle in the euro area is similar to that in Germany and Austria, with slightly higher growth rates. In the fourth quarter, economic growth in the euro area was very weak; consumption and gross fixed capital formation stagnated, while both exports and imports declined.

By contrast, the USA economy continues to expand unabated – despite a similarly restrictive monetary policy as in the euro area. At +0.8 percent, GDP growth in the fourth quarter was barely weaker than in the previous quarter (+1.2 percent).

The inflation rate in Austria continued to fall in January and February. The consumer price index was 4.3 percent above the previous year's level (January +4.5 percent).

The situation on the labour market is increasingly deteriorating due to the ongoing recession. According to preliminary estimates, dependent employment in February was only 0.2 percent higher than in the previous year, and fell for the second month in a row compared to the previous month. Extended unemployment rose by around 1,000 persons compared to January. The number of vacancies registered with the AMS fell once again.

Please find the entire business cycle report here (German version).