16.12.2013

Bank Austria economic forecast for 2014/2015:
Upswing to surprise on upside, 2 percent growth expected

  • Very positive impulses from eurozone, especially Germany
  • Investment backlog easing, consumption will grow again
  • Focus on growth policy instead of budget reform

The persistently strong international demand and the improvement in profitability have contributed to a turnaround in fortunes in the second half of 2013, with most indicators pointing upwards again. "The upswing starting throughout Europe, but first and foremost in Germany, will surprise on the upside. In 2014 we expect 1.5 percent growth for the eurozone and 2.5 percent for Germany", revealed Bank Austria's chief economist Stefan Bruckbauer. The strong upward trend in Germany in particular with its internationally competitive industry will not only pull Austria up in 2014, but Europe as a whole, including France and Italy. On average, the countries of the eurozone send 14 percent of their exports to Germany.

Europe's economy releases its brakes
Furthermore, the European economy is starting to take its foot off the brakes after overcoming the euro crisis and making progress with trend-setting measures such as the banking union. Furthermore, following the massive consolidation of public finances in the last three years there is a relatively small amount of consolidation left to do. In spite of the weaker economic activity, most countries in the eurozone have achieved major restructuring success. The structural budget deficit was reduced by more than three percentage points on average between 2010 and 2013. For the coming year 2014, the average consolidation requirement for the eurozone countries is just 0.3 percent of GDP. "The constraining impact of budgetary policy on the European economy will peter out in 2014", said Bruckbauer.

Upbeat mood in Austria and Europe
Over the next two years the Austrian economy will benefit heavily from the brighter European climate, not just from the strong growth in Germany but also from the recovery in Italy (0.7 percent growth in 2014) and Eastern Europe (2.1 percent in 2014). The Austrian economy is already picking up pace as export orders have been rising sharply since the summer according to the surveys conducted among Austrian purchasing managers. This will be reflected in a noticeable upturn in industrial production. What is more, industrial sentiment, one of the most important components of Bank Austria's Business Indicator, continues to rise. The confidence of European businesses has visibly grown in the weighted average of Austria's key trading partners, and this is infecting Austrian companies too. Austrian and European indices are now higher than their long-term averages. "The Bank Austria Business Indicator has risen sharply since August of this year, and increased further to 1.2 points in November", said Bank Austria economist Walter Pudschedl. This means we have reached the highest reading since mid-2011 and promises a pick-up in growth for the closing quarter of the current year. Bank Austria assumes that GDP will increase by 0.5 percent in the fourth quarter of 2013 compared to the previous quarter.

Stronger exports relieve investment backlog
The robust export demand has now also helped to ease the weaknesses in investment and consumption. In the coming months the investment backlog will steadily diminish as companies react to the stronger demand by implementing replacement and expansion investments that were previously postponed. These are supported by the still favourable financing conditions. In terms of investment in plant and equipment, Bank Austria expects to turn a figure of -2.5 percent into almost +8 percent in 2014. Private consumption is also experiencing a trend reversal. "After a slight reduction in consumption in 2013 at least a modest upturn is predicted for 2014", added Pudschedl. Moderate income growth and the low inflation will be supportive here. This is why Bank Austria assumes that GDP will increase by 2 percent in 2014 and by 2.1 percent in 2015. While the renewed momentum in the export markets is the initial trigger for the Austrian economy, domestic demand will ultimately be the most important pillar of economic growth in Austria, accounting for approximately ¾ of growth.

Comeback of industry
With economic activity on key sales markets recovering in 2014 the demand for industrial goods will grow faster. Bank Austria is consequently assuming an increase in real production output of up to 4 percent in 2014. The best prospects are for the electronics industry, mechanical engineering and car manufacturing, which means many parts of metal-ware production will also receive renewed impetus. By contrast, sectors like food production which are engaged more strongly in markets that are growing at below-average rates, such as Italy and France, will still lack dynamism in 2014. All told this means that every important sector with the exception of tourism and the vehicle industry will at least reach pre-crisis levels in 2014, and this will boost investment too.

Moderate inflation in 2014/2015 despite upwards pressure from higher taxes and levies
In spite of the livelier economic activity, the inflation rate in Austria in 2014/2015 will remain below the 2 percent mark. This will be because of the subdued development in commodity prices, with the forecast price of crude oil coming in below USD 110 per barrel. That said, depending on demand there will be increased pressure on prices in the course of 2014. Moreover, the tax and levy measures agreed upon in the new governmental agreement will push prices up. As in the last three years, Austrian inflation will come in higher than that of Germany in 2014. In 2013 alone the inflation difference between Austria and Germany will be half a percentage point, which is spread over a broad basis in terms of the different product groups. In contrast to popular opinion, however, neither food prices nor fuel prices are responsible for this trend. Food price growth in Germany at roughly 4.5 percent will be approximately 0.3 percentage points higher than in Austria in 2013, while fuel prices in Austria are likely to have fallen even faster than in Germany.

During the crisis the working population increased much faster than employment, which resulted in a higher jobless rate. However, by 2015 the economists at Bank Austria expect employment growth to total 1.2 percent on average, and once again be a little higher than the 1.1 percent increase in the working population. This will only lead to a modest reduction in the unemployment rate, but the employment growth will generate stronger domestic demand and a faster rise in disposable incomes again, to 2.9 percent after only 1.1 percent in 2013. This will also bump the savings rate up slightly. One key reason for income growth being only half as much as it was in the years prior to 2008 is the decline in investment income. Before the crisis, such income contributed 1.6 percentage points to the income growth of 4 percent per annum, but during the crisis it diminished income growth by 1.1 percentage points. Weak, but positive, investment income growth once again will make a significant contribution to stabilising the savings ratio in 2014 and beyond.

The Bank Austria economists assume that the government will continue to fulfil its target announced in 2012 of achieving a balanced structural budget by 2016. Although some specific decisions still need to be made, Bank Austria anticipates a budget deficit of 1.4 percent in 2014 and 0.7 percent in 2015. Public debt would then fall to 71% of GDP in 2015. If one takes into account the new ESA calculation required from 2014 and another 2 percentage points for saving the (partially) nationalised banks, public debt will peak in 2014 at almost 77 percent, before falling in 2015 to 75.5 percent of GDP. "We assume that the government will be able to fulfil its consolidation requirement of roughly 1.5 percentage points by 2016 without any severely negative implications for economic growth", said Bruckbauer.

In terms of interest, the Bank Austria economists assume that the ECB will only raise interest in the third quarter of 2015, but the longer-term rates should rise again in 2014. The euro should gain on most currencies next year. In 2014, Bank Austria anticipates more risks from US economic policy – tapering, budget consolidation – than from the eurozone. The USA could therefore trigger some more distortions in the emerging markets, especially with countries that have current account deficits. However, this should not jeopardise the recovery.

Sustainable growth remains a challenge
"Even though we are optimistic as regards growth in 2014 and 2015, sustainable growth after 2015 remains a challenge", said Bruckbauer, adding that "if both private households and the public sector are net savers in the coming years, businesses will have to invest at least almost the same". This will be achieved through greater production thanks to higher participation rates of the working population, low real interest rates and improved productivity on account of investments. These will also be the most important mid-term challenges for economic policy after budgets are successfully restructured.

 charts (PDF; 15 KB)

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