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15.5.2014

Bank Austria Business Indicator:
Economy stronger in Q1, but currently no signs of tangible pick-up in momentum

  • Bank Austria Business Indicator remains at 1.0 point in April: economic sentiment largely unchanged on previous month
  • Stimulation in first quarter via exports and investments
  • Austria remains on course for economic growth of 2 percent in 2014: recovery in eurozone accounts for 70 percent of acceleration in growth compared to 2013
  • Falling inflation expectations and weak credit demand require action from ECB: rate cut and even negative ECB deposit rate possible

“Bank Austria’s Business Indicator remained at 1.0 point in April, meaning there is no change compared to the previous month. No component of the indicator is currently showing any significant change in sentiment, in either direction”, explained Bank Austria chief economist Stefan Bruckbauer. Factors of uncertainty, including the Ukraine crisis, have barely been reflected in confidence indicators, or have evidently been compensated for by positive influences, such as from the European periphery. Only Austrian industry has lost some confidence, in spite of the tailwind from Europe.

After dipping in the second half of 2013, the Bank Austria Business Indicator recovered again in the first quarter of 2014 and signalled faster growth between January and March. “While the latest indicator reading signals continued growth at the start of the second quarter, the pick-up we expected has yet to arrive”, said Bruckbauer.

Although there are no further signals of a marked acceleration, growth in the Austrian economy will rise slightly again in the second quarter. “After 0.3 percent towards the end of 2013, by our calculations the Austrian economy grew in the first quarter of 2014 by roughly ½ percent qoq, seasonally adjusted. The driving forces behind this trend were sound investment and export activity but also an improvement in private consumption”, explained Bank Austria economist Walter Pudschedl. Although the export economy was able to benefit from more favourable order trends, import demand rose at the same time, which meant foreign trade’s contribution to GDP growth was modest. By contrast, the recovery in investments was instrumental here, both with machinery and equipment as well as construction, boosted by the mild weather. Furthermore, the retail figures available point towards increased momentum from private consumption, supported by purchases brought forward due to tax hikes in March.

“While the Bank Austria Business Indicator has stagnated, we are optimistic that economic growth will pick up again in the second quarter. We reckon that GDP will rise by up to 0.7 percent compared to the previous quarter”, said Pudschedl. As weather conditions start to resemble normality we should see a moderate correction for the construction industry, but this will likely be compensated for by higher energy production, which suffered during the mild winter. Exports will also benefit in the course of the year from the increasingly robust support from Europe, but it is domestic demand that can capitalise on this momentum to generate the crucial stimulus for growth. The recovery in investment activity will be reflected more and more in higher employment. Growth in employment picked up in the early months of 2014. The prospect of an ongoing recovery in private consumption remains intact, despite being nuanced somewhat by the rising joblessness caused by an increase in workforce potential.

Eurozone accounts for 70 percent of growth acceleration in Austria in 2014
“Even though the recovery has so far been lacking tempo somewhat, the Austrian economy still finds itself on course to record GDP growth of 2 percent in 2014. Compared to the 0.4 percent registered in 2013 this means an increase of 1.6 percentage points, which came about largely because of the improved international climate”, said Bruckbauer. The economy in the eurozone contracted by 0.4 percent in 2013, and will grow by 1.5 percent in 2014. This difference of 1.9 percentage points will increase the growth of the Austrian economy in 2014 by roughly 1.1 percentage points compared to 2013, according to a model calculation by the economists at Bank Austria. Consequently, the upswing in the eurozone is responsible for approximately 70 percent of the faster growth in Austria. Positive contributions will also be made by the US economy, which could grow by 2.8 percent in 2014, and even by Central and Eastern Europe, where Austria’s most important trading partners may post improvements. While economic growth in Austria should benefit in 2014 from lower commodity prices too, especially for crude oil, it will be affected by the stronger euro. The economists at Bank Austria expect a rise in the euro to USD 1.41 on average for 2014.

Interest rate move by ECB on horizon for June
The strong euro, the falling inflation expectations and the weak credit development are increasingly causing headaches for the European Central Bank. While inflation in Austria sat at an average of 1.6 percent in Austria during the first four months of the year, caused amongst other things by tax hikes, it was not even half as much in the eurozone, standing at 0.7 percent. “Following the latest statements from ECB President Mario Draghi, we believe it is highly likely the key rate will be lowered, coupled with further liquidity measures such as another LTRO or the purchase of ABS instruments. Even a negative ECB deposit rate cannot be ruled out”, concluded Bruckbauer, though it is still not anticipated that the ECB will make direct purchases of government bonds à la US Federal Reserve.

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