Bank Austria Business Indicator:
Growing geopolitical uncertainty levels the economic outlook down

• Bank Austria Business Indicator falls to 0.2 points in August: lowest reading since summer 2013
• Russia crisis unsettles consumers, industry sentiment affected only in certain areas
• Sluggish economic trends in second half of year: further moderate impulses from abroad, but temporary halt in domestic demand recovery
• Economic growth in Austria expected to be 0.6 percent in 2014, only slightly higher than in previous year
• Exports and investment pick up in 2015: GDP growth forecast at 1.6 percent
• After ECB moves, no interest rate hikes expected until end of 2016

Following a weak first six months, the economic recovery continues to find it difficult to get out of the starting blocks as we head out of summer. "The growing uncertainty fuelled by the Russia/Ukraine crisis was reflected in another decline for Bank Austria's Business Indicator in August", revealed Bank Austria chief economist Stefan Bruckbauer, before adding: "The indicator has been trending downwards slightly for half a year, and now sits at its lowest point since last summer of just 0.2 points." Somewhat surprisingly, the development of sentiment figures for the Austrian economy – that heavily influence the direction of Bank Austria's Business Indicator – was inconsistent. "The burgeoning Russia/Ukraine conflict has darkened the mood of Austrian consumers, as expected. By contrast, Austrian producers have even become somewhat more confident. This partly reveals a correction of the exaggerated fears from the previous month, but also the fact that aside from sometimes significant burdens for individual companies, the macroeconomic effect of a disruption in trade with Russia and Ukraine would be manageable", concluded Bruckbauer. However, the figures from abroad are less encouraging on the whole because industry confidence has deteriorated in the key European sales markets for Austrian companies, such as Germany, Italy and France. That said, the overall index weighted with Austrian foreign trade is currently way above the long-term average.

Growth expectation lowered for 2014
"In light of the very moderate pace of recovery in the Austrian economy over the first six months and the continued lack of stimulus for a noticeable brightening of the economic climate, as underlined by the latest Bank Austria Business Indicator, we have now lowered our growth forecast for 2014 to 0.6 percent", explained Bank Austria economist Walter Pudschedl. The reasons for the adjustment of the growth outlook lie principally in the weaker development of global trade. After a fairly dynamic start to the year, export growth has evidently slowed. The prospects for foreign trade are now gloomier, not just because of the moderate growth in many emerging countries but also due to the recent heightening of geopolitical tensions. And this all at a time that domestic demand was showing initial encouraging signs. Private consumption was rising and investment activity had clearly picked up at the start of the year. The pent-up demand for capital goods, propped up by positive earnings figures from the corporate sector, seemed to dissipate. Both the weaker demand from abroad and the restrained mood will put the brakes on domestic economic activity in the second half of the year. The poorer retail trade trends in the summer is one sign of this.

"Until the end of the year we are only expecting growth rates of 0.2 to 0.3 percent compared to the previous quarter. Our expectations regarding the pace of investments in particular have been scaled back. Moreover, while we assume that the recent weakening of the euro was supportive, it can only mitigate the losses in export growth caused by the slower demand primarily from emerging markets", said Pudschedl. This means that the Austrian economy will continue its steady recovery in the second half of the year, but there will be no acceleration in the growth rate. After GDP rose by 0.3 percent yoy in the first six months of 2014, economic growth is set to remain well below the one-percent mark in the second half of the year too.

The economic climate is expected to start clearing up in late 2014 / early 2015. This should induce a gradual recovery for exports and investments that will slowly take root in the course of the following year. In the latter part of the year it will also boost the momentum of private consumption somewhat. Under these circumstances, economic growth of 1.6 percent is achievable for 2015. That said, there is a significant downside risk in the form of geopolitical tensions caused by the latest increase in sanctions against Russia and the situation in the Middle East.

Hikes in key rate not before end of 2016
The ECB reacted to the heightened downside risks by lowering its key rate of interest to 0.05 percent, and will likely maintain this all-time low rate until well into 2016. "However, the announced plans to purchase covered bonds and ABS, i.e. asset-backed securities, will be more effective than the recent interest cut by the European Central Bank", explained Bruckbauer, before adding: "Given what is likely to be a substantial volume of up to EUR 1,000 billion, these measures together with the targeted long-term refinancing transactions, the TLTROs, will be able to stimulate credit demand." Quantitative easing by the ECB in the form of direct purchases of government bonds à la US Federal Reserve, however, remains an improbable scenario. "A large-scale purchase of government bonds by the ECB would be ineffectual in the eurozone; instead, the ECB creates more scope for investment by means of Mario Draghi’s skilful rhetoric and the ABS programme", continued Bruckbauer.

Inflation remains low
The more moderate growth outlook will have no impact on the development of inflation in Austria over the coming months according to economists at Bank Austria. During the first seven months of the year, inflation averaged out at just 1.7 percent yoy. "Until the end of 2014, inflation will continue to exhibit fairly stable figures of less than 2 percent because the repercussions of the weaker euro will largely be compensated for by the consequences of more subdued growth in demand. Totalling an annual average of 1.7 percent, Austrian inflation will come in considerably lower in 2014, sometimes markedly so, than in the last four years", predicts Bruckbauer.

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