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27.11.2015

Bank Austria economic forecast for 2016/2017:
Economic prospects better than their reputation – Austria can gradually catch up again with growth rate in 2016/17

  • In spite of increase in economic growth to 0.9 percent in 2015, growth lag to Germany remains
  • Growth gap mainly because of weaker domestic demand: higher inflation, higher taxes and duties and slower employment growth resulted in lower income growth
  • Budget consolidation affected economic activity more in Austria than in Germany
  • Labour market suffering under weak employment and strong workforce supply
  • 2016/17 outlook: global environment supportive – Bank Austria Purchasing Managers’ Index signals growth trajectory for industry
  • Consumption to be boosted in 2016 by tax reform
  • Monetary policies diverge: interest rate hike in USA, but more easing in Europe
  • Despite the challenges, economic growth to rise to 1.5 percent in Austria in 2016/17

Various challenges, such as the slowdown in economic activity in emerging markets as the result of low commodity prices or geopolitical uncertainties, have sapped some momentum from the global economy in 2015. At roughly 3 percent the global economy has posted its lowest growth rate since the financial crisis in 2009. Nonetheless, the recovery in Europe has not only continued but been reinforced, and the economy even managed to pick up pace. With conditions brightening up in Europe the Austrian economy managed to grow too. "For 2015 we assume that economic growth will accelerate in Austria to 0.9 percent, after registering 0.4 percent in the previous year. This means, however, that Austria has again lagged behind in terms of growth, particularly vis-a-vis Germany, for the second year in a row", analysed Bank Austria chief economist Stefan Bruckbauer.

Economic growth in Germany amounted to an average of 1.7 percent per year in 2014/15, while in Austria, GDP only rose by 0.5 percent p.a. "Our analysis shows that the weak domestic demand is the main culprit for the growth deficit of the Austrian economy. The reluctance to spend and invest is the current challenge; in terms of the growth input of foreign trade there is no real difference compared to Germany", explained Bruckbauer.

Reasons for weak consumption
Private consumption in particular has been very weak in Austria compared to Germany. "There are three reasons explaining the weak consumption in Austria since 2012, which have led to a decline in net disposable incomes: the weaker employment dynamics, the higher tax and duty raises and the higher inflation", said Bruckbauer. While gross wage growth in Austria per capita stands roughly 0.3 percentage points p.a. higher than the corresponding figure in Germany over the period under review, the weaker employment trends mean that disposable income growth in Austria is 0.6 percentage points lower on the whole. Taking into account the stronger increase in duty and tax payments by Austrians coupled with the inflation over the period, which was 1.4 percentage points higher on average, net real disposable incomes in Austria dropped by ½ percent, whereas Germany recorded an increase of 0.8 percent.

"The different type of budget consolidation also has to be one of reasons for the weak domestic demand, especially consumption in Austria", said Bruckbauer, before adding: "While the fiscal consolidation in Austria between 2012 and 2015 was predominantly revenue based and therefore weighed down on economic activity, almost the entire improvement in Germany can be traced back to the benefits of low interest rates." In both countries the structural budget deficit improved by around one percentage point between 2012 and 2015. In Austria, however, revenues rose 1.3 percentage points and spending by 0.5 percentage points, which subdued growth by 0.8 percentage points. Lower interest rates in Austria were of benefit to the tune of 0.4 percentage points, while in Germany almost the entire fiscal consolidation can be traced back to the interest effect which did not sacrifice growth. Alongside constant revenues, spending was only lowered by 0.2 percentage points of GDP. Germany began its budget consolidation before the crisis.

Labour market under pressure
The contrasting trends in unemployment in Austria and Germany can be attributed evenly to two factors: weaker growth and therefore the smaller rise in employment, and the stronger increase in labour supply. This more dynamic rise in labour supply in Austria can also be explained by the faster growth in foreign and domestic labour, in equal measure. "Assuming the German employment and labour supply trends, unemployment in Austria would not amount to 5.8 percent at present (Eurostat methodology) but would have dropped to 3.3 percent", analysed Bruckbauer.

Outlook for 2016/17
The Austrian economy should manage to keep better pace with European and German growth rates in 2016. With the momentum of the recovery in Europe, the industrial sector in Austria has already improved since the beginning of autumn. "In spite of a weaker result compared to the previous month the Bank Austria Purchasing Managers’ Index amounts 51.4 points. This still clearly indicates growth for Austrian industry, which in the meantime has largely caught up with the pace of growth in Europe", explained Bank Austria economist Walter Pudschedl.

In November, the indicator determined via a monthly survey of Austrian purchasing managers exceeded the long-term average and reveals growth for Austrian industry for now the eighth quarter in a row. "Further increases in orders at home and abroad prompted Austrian industrial companies to ramp up their production in November, albeit more slowly than in the previous month. This is why companies were more cautious with new hires than was recently the case", added Pudschedl, commenting on the most important findings. The current signals, such as the favourable correlation between new orders and inventories, suggest the at least moderate upwards trend is set to continue. In this context, Austrian industry will be bolstered in 2016/17 by the slight improvement in global conditions.

Austria catches up with growth
In 2016/17 the Austrian economy should be able to turn the somewhat better global conditions into faster export growth. The development of the Bank Austria Purchasing Managers’ Index, particularly in international comparison, and the higher growth rates in foreign trade since the summer give reason to be optimistic in this regard. However, the pace of growth in Austria is largely determined by domestic demand. "Private consumption will receive a significant boost in 2016 from the tax reform. This factor alone we believe will produce a positive growth effect of roughly 0.4 percent of GDP, bringing economic growth in Austria to 1.5 percent", said Pudschedl. The tax reform means the unfavourable income trend compared to Germany, as seen in recent years, will be reversed. On average the tax reform will bring about an increase in real incomes of approximately 2 percent

In spite of prevailing challenges the global economy will pick up more momentum in 2016 on the whole, carried by robust US growth and fewer concerns about emerging markets. The recovery in Europe will strengthen throughout 2016 under these conditions. Driven by domestic demand, economic growth in the eurozone will exceed the long-term trend at 1.9 percent. The positive impetus brought on by the low inflation on real incomes in the current year will be replaced in 2016 by stronger income growth thanks to the improvements on the labour market. Consumption and investments will be able to grow faster in Europe during 2016. That said, the output gap is still significant. Combined with the minimal increase in the inflation outlook this will prompt some more monetary easing from the European Central Bank. "We assume that the ECB will announce an expansion of the current securities purchasing programme at its next meeting in early December. QE2 is coming in 2016", said Bruckbauer.

QE2 on the horizon
According to Bank Austria’s economists the ECB is set to spring some surprises with comprehensive measures. Alongside a possible reduction in the deposit interest rate by 10 to 15 basis points the most likely scenario is an expansion of the current securities purchasing programme by roughly EUR 500 billion. The monthly volume would be raised from the current EUR 60 billion to around EUR 75 billion and the programme would be extended into 2017.

Interest and exchange-rate trends will be influenced in 2016 by the diverging monetary policies of the two large economic powers, the USA and the EU. The easing in Europe will be in contrast to the slow return of normalcy in the USA with interest rate hikes from the end of 2015. While US interest rates have already started to rise, capital market rates in Europe are now coming under pressure on account of the continued easing, but they will follow US interest upwards from the early summer onwards. The economists at Bank Austria clearly believe that the US dollar is overvalued against the euro just now. But there will be no adjustment until 2016, provided the recovery in Europe continues and the outlook brightens up. Fundamental reasons for the gradual appreciation of the euro against the US dollar include current account surpluses as well as capital inflows to more favourably priced European assets. Bank Austria expects the euro will sit at 1.12 to the US dollar by the end of 2016, and thus be around 6 percent stronger than just now.

"The economic prospects for the Austrian economy in 2016/17 are better than the current sentiment suggests. The tax reform will partially help to reverse a key factor behind the weakness of Austrian domestic demand. While there are some risks at international level with the turnaround in US interest rates, the economic concerns with China and other emerging markets as well as the geopolitical uncertainties in the Middle East, there are no stumbling blocks standing in the way of a continued recovery in Europe and Austria", said Bruckbauer in conclusion.

Charts (PDF; 287 KB)

Enquiries:
Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 5 05 05-41957;
E-mail: walter.pudschedl@unicreditgroup.at

Note: PMI figures above the 50.0 mark indicate growth compared to the previous month; readings below the 50.0 mark indicate contraction. The greater the divergence from 50.0, the greater the change signalled. This report contains the original data from the monthly survey of purchasing managers from industrial companies in Austria. The survey is sponsored by Bank Austria and has been carried out by Markit Economics under the auspices of ÖPWZ, the Austrian Productivity and Efficiency Centre, since October 1998.