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17.11.2014

Bank Austria Business Indicator:
Economy at a standstill Revival in 2015 requires new stimulus

  • Slight improvement in Bank Austria Business Indicator in October - yet minimal rise to neutral territory signals ongoing stagnation
  • Weak economic prospects for start of 2015 after extremely sluggish second half of 2014
  • Outlook for economic upturn during 2015 intact, but this requires new stimulus to counter pessimistic economic sentiment
  • 2015: higher economic growth coupled with higher unemployment than in 2014
  • Inflation above eurozone figure, reasons for which are home-grown – such as tax hikes or rising unemployment costs

The Austrian economy has slowed markedly since the middle of the year. "The Bank Austria Business Indicator did improve slightly in October and move out of negative territory, but sitting at zero the October reading still indicates ongoing stagnation in the Austrian economy", summarised Bank Austria’s chief economist Stefan Bruckbauer.

After the flat growth in the Austrian economy during the third quarter, the economy is likely to continue treading water in the fourth quarter too. "Although the sentiment indicator components of Bank Austria’s Business Indicator all exhibit a marginal improvement in October over the previous month, the domestic economy is being held back by the underlying pessimism. This is increasing the risk that Austria’s economic standstill will now start to take root", added Bruckbauer. The Russia/Ukraine crisis continues to hamper Austrian industry, especially since the growth prospects for some of the key trading partners in Central and Eastern Europe are dwindling. It is not just in some CEE countries that industry has a more reserved view of business prospects than in the previous month, scepticism is also growing vis-a-vis neighbouring Germany in October. Thus despite tangible improvements in sentiment, the European confidence index weighted with Austrian foreign trade rose only moderately in most Western European markets. The mood of Austrian consumers improved to a somewhat greater extent, but remains lower than the general sentiment in Europe. "The current sentiment does not prompt us to anticipate any imminent improvement in the Austrian economy either for domestic consumers or the production sector. The Austrian economy is and will be flirting with recession, at least until the end of the year. Thanks to the moderate recovery in the first half of the year, economic growth throughout 2014 will only total around 0.5 percent", predicts Bruckbauer.

Two main trends have been instrumental in the current economic slump: the ongoing reluctance to invest – investments in plant and equipment in particular simply cannot get going, despite the low rate of interest – and the constraining effect of foreign trade. The dogged recovery in Europe coupled with the Russia/Ukraine crisis and the tense situation in the Middle East, which has been weighing down on sentiment in the domestic economy for months, is now manifesting itself in falling export demand. Under these circumstances, the slackness in the Austrian economy will prevail through into the New Year. Yet based on at least a slight recovery in exports, the prospects for a revival in the Austrian economy during 2015 are still intact. The Austrian export economy is well positioned internationally, and will be able to harness the robust demand from many emerging markets and the stimulus from the US economy to drive more forceful development, especially since the weaker euro is boosting price competitiveness in many markets. Supported by the ECB’s still expansionary monetary policy, the investment backlog should finally start to clear in 2015, and therefore domestic demand can also make a contribution to reviving the economy. "Alongside the backing from abroad and the loose monetary policy, there should also be other impulses rejuvenating the economy in 2015 with a view to reversing the pessimistic mood that currently prevails", stated Bruckbauer. Investment programmes as have already been discussed in detail at European level are suitable for this purpose. An incremental reform of income tax from the second half of the year could help bring about a change in sentiment too and put some wind back into the sails of Austria’s consumers. Thus after a restrained start to the year, economic activity could slowly get back in gear from 2015. "For 2015 we expect to see higher economic growth than in the current year, whereby the economic figures to be released in the coming weeks as well as the progress with economic policy initiatives will be instrumental in how much faster the Austrian economy can grow in 2015", said Bruckbauer.

Unemployment rate to continue rising in 2015
The situation on the Austrian labour market will continue to worsen under the current economic climate for the time being, even if the pace of the deterioration has already slowed. Bank Austria’s economists assume there are just over 320,000 people out of a job in Austria in 2014. This corresponds to an increase of 30,000 compared to 2013. The unemployment rate in 2014 will rise to an average of 8.4 percent, after sitting at 7.6 percent in 2013. "Since economic growth will be weak and the workforce potential will continue to rise, tensions are set to remain on the labour market in 2015. While there are signs of a trend reversal towards the end of the year, the average jobless rate for 2015 will come in above the current year’s figure", anticipated Bank Austria’s economist Walter Pudschedl.

Inflation remains low, but also high by European comparison
Austria still has one of the highest inflation rates in the eurozone, the reasons for which are home-grown, such as tax hikes or rising labour costs, which impact on the prices of services. From January to October, average inflation in Austria amounted to 1.7 percent yoy. Inflation will sit at the same level to the end of the year as the fall in the oil price is compensated for by the weaker euro. "After totalling an average 1.7 percent in 2014 we predict a modest increase to an average of 1.9 percent for the coming year. The inflation gap to most countries of the eurozone will remain in 2015", forecasts Pudschedl. While inflation in the first six months will be roughly the same as in 2014, demand should drive the figure above the 2-percent mark from the middle of 2015.

 Charts (PDF; 32 KB)

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