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10.12.2014

Bank Austria Economic Forecast for 2015/2016:
2015/16 will bring slightly higher growth, but Austria needs a new, sustainable growth scheme

  • Following tiny growth of 0.2 percent in 2014, higher GDP increase of 0.7 percent in 2015 and 1.5 percent in 2016 expected
  • Five supporting pillars for the economy: Global increase in demand, weaker euro, cheaper oil, expiring budget restructuring in Europe and new monetary impetuses
  • Austria has lost its growth advance compared to the euro zone – existing growth scheme has to be refined

Hopes for noticeable economic growth in 2014 have burst in the wake of the declining tailwind from growth markets and the Ukrainian conflict with Russia. While recovery in the euro zone continued, the additional burdens slowed down the Austrian economy. "We expect tiny growth of 0.2 percent in Austria in 2014, which means that GDP growth is the same as in 2013. However, the growth advance compared to the euro zone, which was common for many years, has been lost," Bank Austria Chief Economist Stefan Bruckbauer says. The economists of Bank Austria expect economic growth in the euro zone of 0.8 percent in 2014.

While the euro zone returned to a path of growth in 2014, the domestic economy cannot keep up with the recovery pace in Europe anymore. In the first three quarters of 2014, Austria recorded one of the lowest growth rates in the euro zone with a plus of 0.4 percent by annual comparison. Only France, Finland and Italy are farther behind. In Germany, the most important trade partner, GDP grew by 1.6 percent, four times as much as in Austria.

Weak growth in Austria is only partially caused by weak domestic demand. But the main reason are exports, which no longer contribute to growth in Austria. Compared to Germany, considerably lower export dynamics could be observed for about three years, and it collapsed completely in Austria in 2014. However, domestic exporters have hardly lost market share in Germany. The Austrian economy still covers more than 4 percent of German import demand. On the other hand, Austrian foreign trade is mainly affected by weak demand from Italy, CEE and Russia. Countries like China, the UK, the US or Switzerland are in a more favorable situation of economic development and are developing respectively stronger import demand. "Our analysis leads to the conclusion that the export weakness, which characterizes the current weak economic development in Austria, can hardly be explained directly with problems caused by structural, price-related or qualitative factors, but is caused by the currently unfavorable mix of export markets," Mr Bruckbauer says.

New growth scheme for Austria?
Economic improvement in important export markets of Austria alone, however, would not guarantee a return to above-average GDP growth in Austria compared to the euro zone. "A more sustainable, balanced growth scheme is developing in CEE, leading to permanently lower import dynamics. Thereby, Austria will lose its basis for the growth advance compared to the euro zone in the future. Thus, the existing growth scheme has to be revised," Mr Bruckbauer says. It is time for Austria to adjust its export economy, also from a regional point of view, which means that the export focus needs to be extended to include high-growth regions like Asia or South America in addition to Eastern Europe. Furthermore, higher importance should be given to domestic demand as a pillar for growth in order to prevent the country from falling behind growth rates in the euro zone permanently.

Five good reasons for higher growth in 2015
At the end of 2014, the Austrian economy is stagnating and there are currently no signs for a considerable improvement of economic development to be seen. "However, we expect that improved framework conditions in 2015 will create the prerequisite for a gradual improvement of economic development," Mr Bruckbauer says. At 0.7 percent, economic growth will still be moderate in 2015 and the Austrian economy will not be able to tap its potential in 2016 either, with GDP growth of 1.5 percent. "In our opinion, there are at least five good reasons why 2015 will be better than 2014. The slight increase in global demand, supported by the weaker euro and lower oil prices, as well as fiscal and monetary impetuses in the pipeline will make higher economic growth possible," Mr Bruckbauer is convinced.

Global economy with more momentum
"Firstly, the global economy will provide more support in 2015. Growth forecasts for the US economy with a GDP increase of 3 percent are quite strong, and recovery in the European economy, driven by Germany, will have slightly more momentum," Bank Austria economist Walter Pudschedl summarizes. Furthermore, there are signs that the Italian economy can achieve slight growth. The economists of Bank Austria expect a GDP increase of 0.5 percent in Italy. The current Bank Austria Business Indicator of November increased to 0.3 points and thereby shows a slight upward movement. Based on the improvement of sentiment in the European industry, it has overcome the lowest annual point.

Budget restructuring in euro zone nearly completed
"Secondly, following the major efforts in the euro zone to consolidate public budgets, no restructuring of public budgets is necessary anymore. While budgets were reduced by an average of 1.2 percentage points of GDP from 2010 to 2013, an adjustment of 0.15 percentage points only is planned for 2014 and 2015. This means that a positive effect on demand of nearly 1 percentage point of GDP in Europe is created "automatically"," Mr Bruckbauer says. Effects on growth from discretionary measures, however, can hardly be expected in 2015, not even in Austria.

The income tax reform discussed can launch positive effects on economic development even when designed in a revenue-neutral way and can primarily help to overcome the pessimistic general sentiment among Austrian consumers. However, implementation will be too late to achieve noticeable results in 2015.

In 2014, the unemployment rate increased to 5 percent according to Eurostat due to the weak economic situation and the increase of labor force available in Austria. In the euro zone and Germany, however, the unemployment rate declined. Austria lost its leadership as the country with the lowest unemployment rate to Germany and is now one of the only six countries in the euro zone with rising unemployment. "In 2015, we expect a further increase of the unemployment rate to 5.1 percent, or 8.6 percent according to the national scheming. We are optimistic that a turnaround will begin in the second half of 2015. But for that to happen, the increase of labor force potential has to slow down and economic development needs to gain momentum in the second half of the year," Mr Pudschedl says.

Support from weaker euro
Thirdly, the weak euro will create a competitive advantage for the domestic export business. "In 2015, the exchange rate of the euro to the US dollar of 1.18 on average will be more than 10 percent lower than in 2014, which results in a positive growth effect of more than 0.3 percentage points in Austria in 2015," Mr Bruckbauer explains.

Cheaper oil leads to noticeable decrease of inflation in 2015
Furthermore, against the background of the globally lower demand dynamics and excess supply due to increased oil production in the US, one can expect that crude oil will remain cheap at least until the middle of next year and that world market prices will start to increase gradually only afterwards. Therefore, crude oil will be 25 percent cheaper than in 2014 with an annual average price of USD75 per barrel.

In euro prices, the reduction will amount to 15 percent in spite of the exchange rate change, which will influence prices and gives reason to expect a positive growth effect of about 0.2 percentage points for Austria in 2015. Each Austrian household will save about EUR150 in fuel costs next year thanks to the lower oil price. Households using oil heating - about 20 percent - will each benefit from savings of even more than EUR150 per year additionally thanks to the lower heating oil price.

"The lower oil price will curb domestic inflation development noticeably, particularly in the first half of 2015. Following an average of 1.6 percent in 2014, we expect a decline of inflation to 1.3 percent in 2015," Mr Pudschedl says. At this level, however, inflation in Austria will still be noticeably higher than the comparative level in the euro zone and higher than in neighboring country Germany. Since the economic crisis, prices in Austria have increased by 3 percentage points more than in Germany. The inflation differential of 0.7 percentage points compared to Germany will not change in 2015 either.

We must not expect too much from lower interest and loose monetary policies
Finally, loose monetary policies in 2015 will support economic development as well, but the possible effects are assumed to be moderate. The transmission mechanism is stalling, monetary policy in Europe seems to have reached nearly the end of its possibilities. New, unconventional measures, like the buying of sovereign bonds, will probably not provide much support either. The implementation of the banking union is likely to provide some relief, but new regulations, like Basel III, will be a burden and make financing of business by banks more difficult. In this context, a permanently low short-term interest level is to be expected in Europe in 2015. Long-term interest rates are likely to show an upward trend at a later stage of the year.

On the whole, framework conditions for higher growth in 2015 are better than expected, thanks to global economic development, the weaker euro, the lower oil price, fewer budget consolidation and low interest. However, pessimism is deeply rooted and increases the sensitivity of recovery to risk factors. Therefore, economic policies should switch to growth support following years of growth-inhibiting policies (budget consolidation, regulation). Austria needs to refine its growth scheme as well, because it benefited considerably from imbalances in CEE prior to the crisis, which can no longer be expected in the next years. Eastern Europe provided a strong contribution to Austria’s growth advance ahead of the crisis. Eastern Europe will continue to be an important growth driver of the Austrian economy. In order to grow more strongly than other euro countries, Austria needs to extend its export focus to other high-growth regions in addition to Eastern Europe and attribute more importance to domestic demand as a growth pillar.

 Charts (PDF; 32 KB)

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