Bank Austria Business Indicator:
Austria's economy undergoing a very modest recovery despite increasing uncertainties

  • Bank Austria Business Indicator remains at 0.1 points in September: improved industry sentiment offsets poorer consumer confidence
  • Economic growth in Q3 2015 higher than in spring thanks to stable increase in consumption and more export tailwind due to positive data from Europe
  • Bank Austria still anticipates overall GDP growth of 0.9 percent through 2015
  • 2016 will bring higher growth at 1.5 percent due to the rise in consumption based on tax reform and ongoing recovery in Europe
  • Expansion of the ECB’s asset purchase programme (QE 2) expected in 2016, but no further reduction in key interest

Despite increasing global uncertainties, the recovery of the Austrian economy is continuing into the start of autumn. "Bank Austria’s Business Indicator remained the same in September at 0.1 points compared to the previous month. The improved confidence in domestic industry as well as an increased tailwind from Europe compensated for the deterioration in consumer confidence," says Bank Austria chief economist Stefan Bruckbauer. For the last six months the Bank Austria Business Indicator has been pointing to a stable, albeit slow, recovery of the Austrian economy. "With an average indicator reading of 0.1 in the third quarter there are still no signs of any noticeable brightening of the economy," says Bruckbauer.

Austrian consumers remain disproportionately pessimistic by European comparison. In September the confidence of domestic consumers deteriorated once again. At the same time though, Austrian households consider their own financial situation to be particularly good. Available data on retail also leads to the conclusion that the generally poor consumer confidence is exaggerated, and private consumption in the third quarter contributed to economic growth. "The recovery of the Austrian economy gathered momentum over the summer. The moderate support from private consumption combined with a somewhat stronger export demand ensured that GDP growth in spring was likely to have been surpassed by 0.5 percent yoy in the third quarter," said Bank Austria economist Walter Pudschedl. The increased tailwind from foreign trade is reflected in the confidence of domestic industry that improved in September as a result of positive data from Europe.

Moderate recovery in 2016
Despite increasing risks, due to the economic downturn in some emerging markets such as China, the crisis in the Middle East or the burdens brought on by EU sanctions against Russia, the Austrian economy will remain on the road to recovery in the coming year and probably grow even faster than in 2015. "There are signs of an increased pace of growth. After the rise in economic output of 0.9 percent in 2015, we predict a modest increase to 1.5 percent for the coming year," says Pudschedl. The Austrian economy will benefit from two developments in particular: on the one hand, consumption will be bolstered by additional stimuli due to the tax reform. On the other hand, more momentum can also be expected in foreign trade than in 2015 in light of the continued steady recovery in Europe. Support in this context comes from the consistently low commodity prices, which puts a damper on inflation and thus strengthens the purchasing power of households. The weak euro also ensures favourable conditions for exports.

ECB will move up a gear in 2016
The economic slowdown in some emerging markets and the resultant drop in commodity prices put a damper on inflation expectations and generated some strong headwinds for the recovery in Europe. As a result, the European Central Bank is expected to ease monetary policy more in 2016. "In a less secure economic environment characterised by increasing downside risks for growth and inflation, we assume that the ECB will extend its asset purchase programme in the coming year. The most likely scenario in my view is an increase of around EUR 300 to 400 billion, therefore around 30 percent of the current purchase programme, from autumn 2016," says Bruckbauer. With this new expansion, the ECB will also aim at warding off an appreciation of the euro supported by fundamentals, which would make it more difficult to achieve the inflation target. However, a further decrease in the deposit interest rates and/or a negative key interest rate are unlikely from the point of view of the Bank Austria economists. The lower end of the interest margin is already likely to have been achieved. "More and more reasons speak in favour of a 'QE2' from the ECB, but we remain confident that the recovery will continue in the eurozone. We still expect economic growth of 1.8 percent for the eurozone in 2016, which is slightly higher than in Austria," says Bruckbauer.

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