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15.02.2016

Bank Austria Business Indicator:
Subdued start to the year, but no setback, despite financial market turbulence and worries about international economy

  • Bank Austria Business Indicator rises to 0.1 points, therefore improving slightly compared to the turn of the year
  • After a disappointing last quarter in 2015, more growth moving into 2016 thanks to tailwind from oil price, exchange rate and tax reform
  • Higher growth in 2016/17 than in previous year, sitting at 1.5 percent: Austria's growth rate converges on the eurozone and Germany
  • Concerns about emerging markets exaggerated
  • ECB expected to ease monetary policy again with dubious impacts on economic activity

The moderate improvement in economic sentiment in Austria has continued beyond the turn of the year. "Bank Austria's Business Indicator rose modestly to 0.1 points in January, the first positive reading since September. This demonstrates that the recent turbulence on the financial markets coupled with the concerns about international economic activity have not hampered the Austrian economy, even if it has yet to emerge fully from stagnation", explained Bank Austria chief economist Stefan Bruckbauer. After the weak development in the second half of 2015, economic activity seems to be picking up in Austria. "Economic growth is returning. Boosted by the encouraging mood in industry as well as the tangible impetus given by the tax reform, the Austrian economy will develop in a positive direction in the first quarter of 2016", said Bruckbauer confidently.

Three factors driving the tailwind in 2016
The economists at Bank Austria reckon growth in the Austrian economy will be faster in 2016 than in 2015, for three reasons: The tax reform and the persistently low oil price are supporting domestic demand, while the undervalued euro is beneficial for the export economy. The boost from the last two factors, however, will gradually fade somewhat in the course of the year: for example, the improvement in the European economy will bring about a modest appreciation in the euro versus the US dollar, and the oil price should at least trend upwards somewhat in the second half of the year based on changed supply and demand conditions. "Activity in the Austrian economy will peak in the first half of the year, which is when we will see the strongest growth of 2016. The tailwind driven by the low oil price and the euro exchange rate will slow, thereby pulling the reins in somewhat on growth trends through into 2017. All told we expect economic growth to total 1.5 percent in both years", said Bruckbauer. This means the rate of expansion in Austria will beat the previous year’s figure of 0.9 percent. "We believe Austria's growth deficit to the eurozone and Germany will vanish in 2016 and 2017 – boosted by the non-recurring effect of the tax reform", anticipates Bank Austria economist Walter Pudschedl.

International economic risks exaggerated
Concerns about economic development in the emerging countries have risen in recent months, triggering turbulence on the financial markets. Alongside external burdens such as the launch of interest rate hikes in the USA by the Fed and the low commodity prices, some emerging countries are also facing domestic economic challenges and structural weaknesses. The restructuring in the Chinese economy towards a more sustainable growth model deserves particular attention. While this does go hand-in-hand with dwindling growth, at a rate of more than 6 percent in 2016 the prospects are still very good. What is more, some of the emerging markets, such as Russia or Brazil for example, are likely to climb out of recession in the course of 2016, while many other emerging markets, like India for example, remain unaffected by these risks and are set to continue with even more dynamic growth. "Despite the recent turmoil on the financial markets, the real economic data available so far does not indicate any contagion in the eurozone or Austria caused by problems in the emerging markets. Nor will the emerging markets pose any serious issues for industrialised countries going forward. The worries about international economic activity are exaggerated in our view, especially since the challenges with the low commodity prices will fade in the course of the year and the risk of an overly aggressive US monetary policy is low too", said Pudschedl, summing up.

ECB to act again
Given the higher risk aversion on the financial markets and primarily the fall in the price of oil, which is pushing the eurozone’s inflation outlook well below its target value, we expect the ECB to loosen its monetary policy strings again. Alongside the announcement of a further reduction in the deposit interest rate in March by at least 10 basis points, the bond purchasing programme may also be adjusted. The low rate of inflation is forcing the ECB's hand. It is questionable, however, whether pushing interest further into negative territory again is the right way to boost economic activity. "Given that all interest rates are trending downwards, the question must be asked whether this can in fact result in a weaker euro", said Bruckbauer, before adding: "It is up for discussion whether the costs and the uncertainty caused by the negative interest rates now outweigh the positive effects."

 tables (PDF; 66KB)

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