Bank Austria Business Indicator:
Growth forecast for 2014 revised down to 1.5 per cent after a slow start to the year

  • Bank Austria Business Indicator remains unchanged during May at 0.9 points: modest growth trend for nine months now with no new impetus
  • Despite slow start to the year, however, things are expected to pick up during the second quarter mainly driven by demand from abroad
  • Growth in Austria boosted by increasing economic stability in Europe, but emerging countries are slowing unexpectedly
  • GDP prediction revised down to 1.5 per cent for 2014. 2.1 per cent is still expected for 2015
  • Increase in available workforce and restrained economic upturn drive unemployment for 2014 to post-war record
  • Annual average inflation for 2014 stands at 1.7 per cent, with domestic factors contriving to keep Austria's rate of inflation above other European countries

After a moderate start to 2014, with GDP just 0.2 per cent up on the previous quarter, the economy in Austria is still not picking up any faster for the moment. "The Bank Austria Business Indicator remains unchanged from the previous month and currently stands at 0.9 points", commented Stefan Bruckbauer, Chief Economist at Bank Austria, adding: "The indicator has been flatlining for nine months now, although this does show that the domestic economy is continuing to enjoy an uninterrupted, if restrained, recovery. The economic picture remains one of rather sedate progress as we reach the middle of the second quarter of 2014, with the substantial revival that we are still expecting failing to materialise thus far."

"Having said this, some individual components of the Bank Austria Business Indicator are giving weight to the prospect of the economy picking up more quickly in the near future", Bruckbauer explained. "May saw a noticeable improvement in industrial sentiment in the EU, while Austrian industry also gained confidence. The only thing preventing an increase in the Bank Austria Business Indicator was the growing uncertainty experienced by Austrian consumers." In addition, consumer sentiment in Austria has not always been a true reflection of their actual behaviour. The retail data available to date and the slight momentum in the credit market suggest that consumption is increasing despite the scepticism. Together with the rosier prospects for industry, there are signs that the economy may even start to pick up during the current quarter. "Following the modest start to the year, we are expecting the second quarter of 2014 to see GDP growth of 0.6 per cent – stronger than the previous quarter – on the back of positive export performance and somewhat brisker consumption", Bruckbauer predicted.

"During the first half of 2014, Austria's economy has not developed as well as we expected at the turn of the year", said Bruckbauer. "This is why we have revised down our predicted growth for 2014 by 0.5 percentage point to 1.5 per cent. The main reason is that demand from abroad remains weak as the emerging economies are flagging, which has meant more restrained investment activity in Austria than we had been expecting." Bank Austria's economists remain optimistic, however, with the recovery of the domestic economy remaining intact. There is a significant need for replacement investments, given the investment backlog during the past two years, while expansion-related investments will also be boosted by an environment increasingly associated with growing export demand and where financing terms remain favourable. In addition, private consumption will be able to maintain its slight upward trend over the coming months. Low inflation and increasing employment levels will enable a growth in consumption once more in 2014 after the slight downturn during the previous year. Although investment levels and consumption will again contribute to the increase in GDP during the current year, demand from abroad in 2014 is set to be the main driver of the Austrian economy's sustained recovery.

Not until 2015 will investments and private consumption replace demand from abroad, which is still strong, as the backbone of economic growth in Austria. "As far as 2015 is concerned, we are optimistic that the upswing in domestic demand will pave the way for economic growth of 2.1 per cent", said Bruckbauer. The growth forecasts of Bank Austria's economists thus remain unchanged for the coming year.

Unemployment reaches record level
After levelling out during the mild winter, Austria's unemployment has been increasing since spring and is currently actually accelerating. Meanwhile, growth in the employment level has almost ground to a halt when adjusted for seasonal effects. Apart from the restrained nature of economic growth, the current trends are also a product of the increase in the available workforce, which is crowding the labour market. Unemployment climbed to 8.5 per cent on average during the first half of the year, 0.8 percentage point up on the previous year. The situation in the labour market is expected at least to stabilise, thanks to the more favourable prospects for growth during the second half of the year. It is now unlikely, however, that the trend will be reversed before 2015. "Although 2014 will see the number of people employed in Austria increase by around 1 per cent year-on-year, unemployment will still reach record levels. We are now expecting the annual average unemployment rate for 2014 to increase to 8.4 per cent, just shy of the post-war record of 8.7 per cent seen in 1953", explained Bank Austria economist Walter Pudschedl. If trainees are included, the unemployment rate for 2014 easily exceeds 10 per cent.

There is a good chance that the unemployment rate will fall slightly in 2015 for the first time in three years, given a somewhat higher rise in the employment level than in the current year that is due to a brisker economic trend.

Inflation still low
Following the slight year-on-year increase in inflation to 1.8 per cent in May, Bank Austria's economists are not expecting prices to rise quite so quickly over the coming months. The average year-on-year inflation rate from January to May 2014 was 1.7 per cent. Slightly higher inflation figures are to be expected towards the end of the year, rebounding from the lows seen last autumn. Inflation remains well below the 2 per cent mark, however, in the absence of external factors likely to drive up prices such as higher raw material costs or significant fluctuations in exchange rates between the euro and other currencies. "For 2014 as a whole, we are expecting inflation to average out at 1.7 per cent", said Pudschedl. While many countries in the Eurozone are worrying about deflation, domestic factors such as tax increases – but also rising labour costs and their impact on the prices of services – mean that Austria's rate of inflation remains well above both the Eurozone average and other countries with similarly performing economies, such as Germany", Pudschedl commented.

With the first signs of interest rate rises emerging from the USA and the UK, the ECB's offensive designed to quash expectations of higher rates for the Eurozone will be particularly important for protecting the embryonic recovery. "In addition to the offensive measures adopted by the ECB, the Eurozone now needs greater investment, including from the public purse, to drive the upturn forwards", Bruckbauer suggested. In view of the record unemployment, not least in Austria, the low interest rate is entirely consistent with developments in the wider economy, particularly given that real interest rates on overnight deposits have on average always been negative over the past 60 years.

 charts (PDF; 43 KB)

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