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Bank Austria Business Indicator:
Recovery in Austria to pick up momentum in 2016 – despite gloomier consumer sentiment just now

  • Bank Austria's Business Indicator sinks to new annual low in November of -0.3 points
  • Decline largely due to renewed deterioration in sentiment among Austrian consumers, while Austrian industry now looks forward with more confidence to the New Year as European climate brightens
  • Improved external demand generates strongest economic growth in 2015 during last quarter, +1.4 percent compared to previous year: GDP growth of 0.9 percent still expected for 2015
  • Economic growth to rise to 1.5 percent in both 2016 and 2017 thanks to tax reform and supportive global environment
  • Unemployment continues to rise: up to 9.5 percent in 2016/17 after 9.1 percent on average in 2015

"The Bank Austria Business Indicator fell again in November. Now sitting at -0.3 points, the indicator has reached its lowest reading of 2015 just before the turn of the year", revealed Bank Austria chief economist Stefan Bruckbauer. For the third month in a row the indicator suggests a moderate slowdown in economic activity as well as a divergence in external and internal demand, which has even intensified recently according to the underlying sentiment indicators. "The decline in the Bank Austria Business Indicator in November is due first and foremost to the renewed deterioration in sentiment among Austrian consumers, while Austrian industry now looks forward with more confidence to the New Year as the European climate brightens", analysed Bruckbauer.

Despite the downward trend in November and the average reading of the Bank Austria Business Indicator expected to be -0.2 points in the last quarter of 2015 – its worst result in more than three years – the economists at Bank Austria assume that the Austrian economy will have maintained its moderate growth trajectory at the end of 2015. "For the last quarter we even expect the strongest economic growth in 2015, up by 1.4 percent compared to the previous year. This means GDP growth of 0.9 percent that we have predicted for a long time will be achieved for 2015 as a whole", explained Bank Austria economist Walter Pudschedl. One key factor in the continuation of this growth trajectory is the improvement of demand for export-oriented manufacturing companies, which is well reflected in industrial sentiment. Orders from abroad are rising, and exports have been trending upwards slightly again since the summer. Another factor is the pessimism of Austrian consumers, which seems to be very exaggerated. Contrary to the sentiment weighed down by the refugee situation and the ongoing tension on the labour market, real economic figures – such as retail sales – are offering at least moderate support for economic growth via consumption.

Higher growth in 2016/17
"We anticipate much stronger GDP growth of 1.5 percent in 2016 and 2017. Yet it is not just the pace but above all the underlying impulses for economic growth that will differ strongly from the current year. While external effects such as the weaker euro and the lower price of oil were conducive for progress during 2015, fiscal policy is set to dominate in 2016. The tax reform and expenses to care for refugees will be coupled with minor boosts brought on by the residential housing initiative", said Pudschedl.
In 2015 the weaker exchange rate and the lower prices of commodities accounted for more than two thirds of the entire GDP growth. The fall in interest rates was also supportive as fiscal policy provided little stimulus. The slowing growth in global trade, by contrast, was a significant burden. The support given by the exchange rate and the oil price is set to all but disappear in 2016, while the contribution made by the lower interest rate will at least be less significant. However, fiscal policy will make the crucial difference in 2016. The tax reform alone will produce a positive growth effect of roughly 0.4 percent of GDP overall. What is more, higher state spending prompted by having to cope with the refugee crisis is likely to trigger a short-term growth impact in 2016 amounting to roughly 0.2 percentage points. Furthermore, the gradual recovery of global trade will be supportive too. Besides the emerging stability in industrial countries, the growth weaknesses of emerging countries largely seem to be consigned to the past. Economic growth is not likely to accelerate any further in Austria for 2017, although the more dynamic global trade is expected to provide additional backing. Besides the reduction in fiscal stimulus, this is because growth prospects will be limited by a renewed appreciation of the euro and a probably higher price of oil.

Moderate rise in inflation during 2016
The somewhat higher commodity prices are likely to be responsible for faster inflation in in 2016 and especially in 2017. Following an average figure of 0.9 percent in 2015, inflation is projected to total 1.7 percent in 2016 and 1.9 percent in 2017. The price of oil, however, should stay relatively moderate at an average of USD 60 per barrel in 2017 according to the economists at Bank Austria. This is why the pick-up in domestic economic activity in particular is the main demand-linked reason for the pressure on prices. Among other things the increase in the reduced rate of VAT as part of the tax reform from 10 percent to 13 percent for selected products will have a minor effect on increasing inflation.

Situation stabilising on labour market
In spite of the faster growth, tensions will remain on the Austrian labour market in 2016/17 too. The unemployment rate will rise to 9.5 percent on average following 9.1 percent in 2015. This means the Bank Austria economists at least expect the situation will stabilise as the major factors which recently triggered a strong increase in the supply of labour tend to fade away. "While Austria is unable as yet to reproduce the declining jobless rate as seen in Europe, an average rate of 6.1 percent in both 2016 and 2017 according to the Eurostat definition is still one of the lowest unemployment rates on the continent", said Bruckbauer in conclusion.

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