15.11.2013

Bank Austria Business Indicator:
Recovery continues

  • Bank Austria Business Indicator continues uptrend, rising to 1.2 points in October
  • Closing quarter of 2013 will produce strongest economic growth since early 2011 – moderate growth expected for 2013 as a whole
  • Brisker growth on a more balanced basis for 2014: investments and consumption support export economy
  • Debate about budget gap stokes uncertainty
  • Rational reduction in key interest rate given falling inflation and record unemployment

The recovery in the Austrian economy is making progress. The upwards trend observed since the summer is continuing. "The pick-up in economic activity is starting to take root. Bank Austria's Business Indicator reached 1.2 points in October, its highest level since the summer of 2011. Our indicator only left negative territory three months ago, and since then it has produced a solid upwards trend", enthused Bank Austria chief economist Stefan Bruckbauer.

Closing quarter of 2013 with strongest economic growth since early 2011
The steady growth of the Bank Austria Business Indicator and particularly the noticeable rise in October compared to the previous month suggests the recovery in the Austrian economy will pick up in the last quarter of 2013. "After GDP expanded by 0.2 percent in the third quarter of 2013, economic growth towards the end of the year should beat the previous quarter by approximately 0.6 percent. This will likely generate the fastest economic growth since the start of 2011", argued Bank Austria economist Walter Pudschedl. The economy is now expected to expand during 2013 as a whole by 0.3 percent. This means the economists at Bank Austria have scaled their GDP forecast back slightly after the Q3 figures came in just below expectations.

Investments and consumption support export economy
External demand is likely to remain the principal growth driver until the end of the year. Purchasing managers' indices throughout Europe are heading upwards, the order books are filling up and the mood throughout European industry continued to improve in October. Confidence is growing in all the main markets of the Austrian economy. Austrian producers are much more optimistic about their business prospects than in previous months too. While industrial confidence is still below its long-term average after a steady upwards trend since the early summer, the situation has not been as good as this since the first half of 2012. "The stability in Europe has not only helped to brighten up the mood among European and Austrian companies, we also observed more optimistic views from Austrian consumers in October than before", said Pudschedl. In spite of the ongoing deterioration in conditions on the labour market, a modest increase in retail sales indicates that private consumption continues to offer tentative support for GDP growth in the closing quarter of 2013. The investment backlog of previous months should also ease, which means that towards the end of the year domestic demand will make a significant contribution towards faster economic growth.

Economy to pick up in 2014
The Austrian economy will be able to maintain its new momentum in the forthcoming year. The economists at Bank Austria forecast economic growth in 2014 of 1.8 percent. With monetary conditions still favourable, progress being made in implementing the banking union and above all the diminishing need for consolidation in Europe, there will be a more balanced foundation to the brisker growth in Austria. Domestic demand will be able to lend more support to the export economy as the main driver of growth than in 2013.

Debate about size of budget gap was not advisable and fuelled uncertainty
However, the economists at Bank Austria expect domestic fiscal policy to subdue economic activity slightly, a view that has not changed over the last few months. The latest debate about funding gaps in the state budget was "not expedient" according to Bank Austria's chief economist Stefan Bruckbauer, adding that "they still assume a structural budget deficit of 1.8 percent of GDP for 2013. This is therefore in line with the consolidation requirement of achieving a balanced structural budget around 2017." In absolute terms, with GDP estimated at EUR 315 billion in 2013, this produces a need to consolidate totalling almost EUR 6 billion, while the cumulative figure for the entire financial framework is more than EUR 20 billion. "With a credible plan for reducing the structural deficit coupled with the transparent winding down of HGAA, the budget figures available should give no reason for investors to have any worse assessment of Austria's credit rating than before the elections. However, the debate in recent weeks has given rise to some uncertainty that has nudged risks upwards somewhat, reducing our room for manoeuvre", revealed Bruckbauer. At any rate, there is now more pressure on delivering a clear-cut plan.

Inflation remains low, interest rates too
The declining inflation trend, which set in at the start of 2013, will continue until the turn of the year according to the economists at Bank Austria. "After the decline in October to 1.4 percent, inflation by the end of the year will also likely be below 1.5 percent. The still moderate economic activity coupled with the stable commodity prices will keep inflation at a low level in the first half of 2014; only thereafter could the faster economic development trigger a trend reversal", said Bruckbauer. Averaging out at an annual 1.8 percent in 2014, inflation will come in just under the predicted figure of 1.9 percent for 2013.

ECB rate cut makes economic sense
"As we have repeatedly shown in the past, the biggest risk factor for the European and the Austrian economy is not inflation, but the possibility of deflation. Given the lowest rate of inflation in almost four years and in light of the record unemployment in Austria we believe the recent decision by the European Central Bank to lower the key interest rate to just 0.25 percent is the right one", said Bruckbauer. Extending the full allotment for its tenders until July 2015 is also positive news from the ECB. "It is clear that the central bank is taking the more restrictive financial environment seriously. Since its conventional options have now practically been exhausted, the next step can only be a long-term tender if the financial climate continues to get worse", argued Bruckbauer. As the US Federal Reserve will presumably start cutting back on its securities purchases in the first quarter of 2014, the economists at Bank Austria believe it is now even more probable the ECB will employ further liquidity measures.

 charts (PDF; 45 KB)

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