Bank Austria Business Indicator:
Austrian economic growth remains subdued

  • Bank Austria Business Indicator once again declined slightly compared with previous month, but remains in positive territory
  • Favourable external factors supporting economic improvement
  • However, Austrian consumers are most pessimistic of any country in Eurozone, although they see their own financial situation in a more positive light than consumers elsewhere on average
  • Growth too low for rising labour force – average annual jobless rate to increase to 9.2 per cent in 2015
  • Inflation rising again: climb in oil prices to push inflation above 1 per cent mark in coming months, annual average for 2015 now expected at 1.2 per cent

"Following the significant rise in April, the Bank Austria Business Indicator has declined again slightly. However, the indicator is still in positive territory at 0.2 points and points to a continuation of the moderate economic recovery in Austria in the coming months," said Stefan Bruckbauer, chief economist at Bank Austria.

While the beginning of the year saw very subdued development and was characterised by particularly gloomy sentiment and a high level of uncertainty compared with other European countries, there are increasingly signs that Austria's economy will be able to follow in the footsteps of the recovery in the Eurozone, albeit only at a moderate pace for the time being. However, the outlook with regard to sentiment remains very reserved. On one hand, sentiment among Austrian consumers has worsened considerably again. On the other hand, sentiment in Austrian industry has stabilised, which can primarily be attributed to a European environment in which companies are very optimistic about the business outlook despite the slight correction that is currently under way.

Austrian consumers pessimistic despite good financial situation
Austrian consumers have a more pessimistic view of the general economic situation in relation to the long-term average than consumers in any other country in the Eurozone. Consumer sentiment was considerably higher than the average for the last 10 years in virtually every country except for Austria, where it was significantly lower. This is even more surprising when one considers the fact that Austrian households see their own financial situation in a more positive light than households in most other Eurozone countries on average. "Austrian households see their own financial situation in a more positive light on average. But when it comes to the general economic situation, they are more pessimistic than the households in any other Eurozone country," reported Bruckbauer, adding, "The current pessimism in Austria is apparently having a bigger influence on people's perceptions than the actual economic conditions."

Favourable external factors such as the stabilisation of the recovery in Europe, the weak euro, and low oil prices are expected to support demand for Austrian exports in the coming months. Foreign trade will gain momentum despite the worsening conditions in some growth markets and the continuing Russia/Ukraine crisis. However, it will no longer make such a strong contribution to growth due to the increase in imports. Nevertheless, the resurgence in foreign demand will likely provide a boost to investment activity at least in the second half of the year, especially because financing conditions should remain favourable thanks to the ECB's loose monetary policy. Despite the continuing rise in unemployment, the improving economic data should brighten the pessimistic sentiment among consumers – albeit gradually. Supported by low inflation, private consumption will likely continue along its moderate growth path and make domestic demand an increasingly important driver of Austria's economic development in the coming months. "Following the still sluggish growth at the start of the year, we expect to see a bit more momentum in the second quarter and anticipate a continuation of the moderate recovery of the Austrian economy up until the end of the year. We are sticking to our growth forecast of 0.9 per cent for 2015, which means that like last year, Austria will fall short of the Eurozone average," explained Bruckbauer. Bank Austria’s economists anticipate economic growth of 1.4 per cent for the Eurozone in 2015.

Inflation rising again, but will remain moderate
While the growth outlook is gradually improving, the inflation expectations are beginning to normalise in Austria as well. Three factors are now contributing to this trend: First, the decline in commodity prices has come to an end, and crude oil prices in particular have increased again in recent weeks. Second, import prices for some consumer goods are rising due to the weakness of the euro. Although the euro has appreciated versus the US dollar again in recent weeks, it is still trading about 20 per cent lower than in 2014. Third, the freedom of companies to set prices has increased recently, and more upside pressure on inflation is to be expected in the coming months due to demand. "After the low inflation readings at the beginning of the year, the reversal has already set in. Starting in the second half of the year, inflation will increasingly move towards the 2 per cent mark in year-on-year terms. Based on the earlier-than-anticipated recovery of crude oil prices, we have raised our inflation forecast for 2015 from 0.9 per cent to 1.2 per cent," reported Bank Austria economist Walter Pudschedl.

Unemployment rate to rise above 9 per cent in 2015
"The modest recovery of the economy will not be enough for an improvement on the labour market in 2015, particularly because the labour supply is still expanding significantly. We now expect an average annual unemployment rate of 9.2 per cent for 2015, compared with 8.4 per cent last year," noted Pudschedl. Austria's potential labour force has increased by over 170,000 people since 2011. Along with increased participation on the part of older workers due to changes in the pension laws and a rise in the employment rate among women, this can primarily be attributed to the influx of foreign workers. The labour supply has increased by 155,000 people due to immigration alone, with roughly two-thirds of these new labourers coming from the EU, and especially from Hungary, Romania, and Slovakia. Through the first four months of 2015, however, the number of jobs had only increased by just under 55,000 during these years of low growth. This has led to a crowding-out effect on the Austrian labour market that will fuel a continued rise in unemployment in the coming months.

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