Bank Austria Business Indicator:
Economic recovery in Austria remains hesitant in summer

  • Bank Austria Business Indicator increases slightly in July to 0.2 points: mood in industry brightens again
  • Negative effects from China have little impact thanks to continuing recovery in Eurozone and USA
  • Weak investment in Austria and Europe primarily responsible for Austria’s below-average recovery
  • Consumption boosts 2015 growth: slightly brisker general economic trend expected in second half of year
  • Bank Austria still anticipating GDP increase of 0.9 per cent in 2015 as a whole
  • Low raw material prices more than offset negative effect from China: 1.2 per cent inflation expected

The Austrian economy is continuing to grow at a rather sedate pace. "After the slight economic slowdown at the end of the first half of the year, things are now looking a bit more positive at the height of summer. This is also reflected in the latest Bank Austria Business Indicator, which rose to 0.2 points in July," reported Stefan Bruckbauer, Chief Economist at Bank Austria. However, this means that the domestic economy has not yet managed to speed up growth from the second quarter. Nevertheless, prospects of a more substantial revival in the Austrian economy are still intact. "In the coming months, we expect the Austrian economy to pick up gradually, enabling quarterly growth rates of up to 0.5 per cent by the end of the year. The current improvement in the economic climate in industry, which has brought about the slight increase in the Bank Austria Business Indicator in July, is a small taste of what is to come," said Bruckbauer.

Order books are starting to fill up, particularly due to more demand from abroad and a satisfactory business situation, thus putting Austrian industry in a noticeably more positive mood at the start of the second half of the year. "Austria’s industry sentiment exceeded the long-term average in July, as has already been the case in Europe for a while. For the first time in a year, Austria’s industrial companies, which are predominantly exporters, are now feeling confident. This promises more momentum in Austrian export in the next few months," said Bank Austria economist Walter Pudschedl.

Although foreign trade failed to stimulate growth in the first half of 2015, the Austrian economy should nevertheless be better able to take advantage of the increasing support coming from Europe over the coming months, particularly given that the agreement on a further Greek bailout has cleared one cloud from the horizon. Most countries in the Eurozone are recovering rapidly, enabling economic growth of 1.4 per cent to be forecast for 2015. In the wake of this recovery, the growth prospects for Central Europe’s growth markets are improving by an average of over 3 per cent. The Austrian economy should be able to benefit from this trend. The USA’s solid economy, which is growing by around 2.5 per cent, is also providing support, together with the fact that the now-weaker euro allows a competitive advantage to be exploited. "While the economy in the Eurozone, Central Europe’s growth markets and the USA is bolstering the Austrian economy in the second half of the year due to higher export demand, a stronger headwind is to be expected from some other growth markets," said Pudschedl. In addition to the ongoing Ukraine crisis and the recession in Russia, concerns about the Chinese economy are having the strongest negative impact at the moment. "Taking all effects on Austrian exports into account, we are forecasting a positive second half of the year overall. Foreign trade will further stimulate economic growth," predicted Pudschedl. The share of Austrian goods exported to China is modest at about 2.5 per cent. If the decline in exports to China of around 5 per cent year-on-year in the first four months were to be applied to the year as a whole, this would result in falls of around EUR 170 million compared with 2014. Even factoring in exports of services and indirect exports via third countries, the impact of weakening demand from China on the Austrian economy remains manageable. The demand for exports from China makes up around 70 per cent of domestic value added, meaning that, according to the calculations of Bank Austria’s economists, a nominal decline in demand from China of 5 per cent would affect Austrian value added by less than 0.5 per mille. However, the support for the Austrian economy provided by foreign trade will be more subdued in the second half of the year than had previously been thought a few months ago. This is less a result of the regional shift in demand between growth markets and industrialised nations and more due to the fact that the expected recovery in Europe is being driven heavily by consumption rather than primarily by investments as had been predicted. With its traditional strengths lying in manufacturing capital goods and equipment, the Austrian export economy is benefiting relatively modestly.

Although investment activity is only recovering slightly throughout Europe in the second half of the year and is also gaining little momentum in Austria despite persistently low interest rates, consumption will be the decisive driver of growth in Austria, as it was in the first half. Consumer pessimism, which increased even more in July, is not a reliable indicator at present in view of the steady growth in consumption. However, the rising workforce numbers in Austria despite increasing unemployment and low inflation point towards a continuation of the moderate growth in consumption, which will be underpinned by the anticipatory effects of the wage and income tax reform set to come into force at the start of 2016.

"Overall, the Austrian economy will gain a bit more momentum in the second half of 2015 than in the first half of the year thanks to slightly more positive export prospects and the small improvement in domestic demand. We are still expecting GDP to rise by 0.9 per cent," forecast Bruckbauer. Bank Austria believes that the difference between Austria’s growth and the Eurozone’s – likely to be 1.4 per cent – is a result of the structural pattern of the current upturn in Europe and is not due to a weakness of the Austrian economy caused by lower competitiveness.

Inflation to increase only slightly in the second half of the year
At the start of the second half of the year, inflation rose slightly to 1.2 per cent year-on-year after averaging 1 per cent compared with the previous year in the first six months of 2015. In the coming months, the upward trend in inflation will continue to be gradual because concerns about the economy in some growth markets, aggravated by the devaluation of the Chinese currency, are dragging raw material prices down. The agreement of a nuclear deal with Iran has also lead to a relaxation of the crude oil market, while supply remains consistently high. "The increase in inflation in the second half of the year will only be minor because raw material prices are failing to rise. A slightly sharper increase in inflation is not expected until the last quarter of 2015 because the drop in crude oil prices in the previous year will be removed from the equation in this period. Overall, we are expecting average inflation for 2015 to remain the same at 1.2 per cent," said Pudschedl.

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