Bank Austria Business Indicator:
Austria’s moderate economic recovery solidifying

  • Bank Austria Business Indicator up slightly in May: Austrian economy gains a bit of momentum
  • Recovery in Europe also carrying over to Austria, but economic growth will lag behind European average in second quarter at 0.3 per cent
  • Austrian growth forecast of 0.9 per cent for 2015 significantly lower than in Eurozone and Germany
  • Higher inflation contributing to Austria's growth gap
  • Austrian inflation nearly 5 percentage points higher than that of Germany since 2008: effect of convergence of lower price level following years of above-average growth in Austria

Austria's economic development remains sluggish. "The Bank Austria Business Indicator came in at 0.3 points in May, which is only a marginal improvement over the previous month. At the same time, the fact that the indicator was in positive territory for the third month in a row suggests that Austria's moderate economic recovery is solidifying," said Stefan Bruckbauer, chief economist at Bank Austria.

After an average value of 0.1 points in the first quarter of 2015, the readings so far point to higher results for the second quarter. "The slight improvement of the Bank Austria Business Indicator since the winter suggests that Austria will turn in growth of as high as 0.3 per cent in quarter-on-quarter terms in the second quarter. Thus, the Austrian economy will surpass the gain of 0.1 per cent achieved at the start of the year," reported Bruckbauer optimistically. However, Austria's economic growth will remain weaker than that of the Eurozone for the time being. Bank Austria's economists expect GDP to increase by 0.4 per cent in the Eurozone in the second quarter, marking the sixth quarter in a row that Austria’s economic growth will be lower than the European average.

Although the recovery of the Austrian economy has proceeded very slowly so far, the improvement in Europe is slowly but surely providing Austria with a boost. For example, sentiment in Austrian industry brightened in May thanks to the continued positive sentiment in Europe's industrial sector. In addition, export orders are now starting to increase slightly. Austria's economy will receive new stimulus from the export sector in the coming months, as the recovery in Europe is solidifying. The weak euro will have a positive impact despite the fact that economic activity appears to be flagging in certain emerging markets. The turnaround in the export sector will likely be followed by a positive trend in investment activity in the second half of the year. However, because the capacity utilisation of Austria's economy is currently far below the long-time average at just under 84 per cent (lower than in the Eurozone as a whole, for example), the chances of a considerable improvement in investment are slim for the time being. "We expect consumption to be the main driver of the slight economic upturn in the coming months. On the one hand, consumers in Austria remain pessimistic when it comes to their assessment of the general economic situation. On the other hand, however, Austrian households have an exceptionally positive view of their own financial position. This leaves room for the moderate growth in consumption to continue," said Bank Austria economist Walter Pudschedl.

Bank Austria expects economic growth of 0.9 per cent in 2015. "More support is expected to come from consumption in 2016. The tax reform will provide an additional growth effect of nearly 0.4 percentage points, particularly because we do not believe that the tax cuts will be fully offset by reciprocal financing measures. This will allow for a larger expansion of GDP in 2016 than this year, with growth coming in at 1.5 per cent," added Pudschedl. In addition, investments will be able to gain more momentum in an environment of persistently low interest rates.

Comparatively high inflation hindering growth
Over the first five months of the year, average inflation totalled 0.9 per cent in year-on-year terms, which is 0.8 percentage points lower than in the same period last year. Due to the reversal of commodity prices and demand factors, inflation will gradually climb towards 2 per cent year-on-year in the second half of the year. "We expect an average annual inflation rate of 1.2 per cent for 2015 in Austria. Although this is low, it is still considerably higher than the inflation in most Eurozone countries. And while consumption is being supported by the low inflation, this trend is much less pronounced than in Germany, for example, where inflation is expected to amount to just 0.1 per cent in 2015. Therefore, the significantly higher inflation in Austria compared with Germany is contributing to the current growth gap in the Austrian economy," asserted Bruckbauer. But 2015 is not the only year in which Austria will have higher inflation than Germany. "Austria has had higher inflation than Germany for quite some time, and the accumulated difference has risen to nearly 5 percentage points in the seven years since the financial crisis. Reasons for this include much more rapid rises in service prices, especially in connection with housing and telecommunications. We believe that this is largely an effect of the convergence between the lower price level in Austria and the higher price level in Germany as a result of relative gains in prosperity in Austria in previous years," concluded 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