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13.05.2016

Bank Austria Business Indicator:
Economy receives modest boost again from domestic demand

• Bank Austria Business Indicator still in positive territory in April, despite weakening slightly compared to previous month
• Climate marginally brighter in industry in spite of sentiment slump in Austria
• Domestic demand to fuel momentum in 2016 after good start to the year; economic growth expected to be 1.5 percent despite slowing tempo
• Tax reform and low inflation bolster consumption, but investments make slow progress and outlook for foreign trade hampered by problems in emerging markets
• Stabilisation on labour market draws to a close: jobless rate to rise in 2016 to 9.5 percent

"Following the sound start to 2016 the Austrian economy has continued with its moderate recovery on a somewhat more subdued basis. While Bank Austria's Business Indicator only totalled 0.1 points in April, and thus fell short of the previous month's reading, it remained in positive territory, which points towards sustained growth in the Austrian economy", said Bank Austria chief economist Stefan Bruckbauer. Somewhat surprisingly, the development of sentiment figures for the Austrian economy – that heavily influence the direction of Bank Austria's Business Indicator – has recently been inconsistent. “In spite of the recent labour market stability in previous months and the noticeably positive impacts of the tax reform, the mood among Austrian consumers darkened again in April. Austrians continue to be particularly pessimistic both by historical and European comparison. Austrian producers, on the other hand, have gained some confidence", said Bank Austria economist Walter Pudschedl talking about the detailed developments of Bank Austria’s Business Indicator. Nonetheless, industrial confidence in Austria is currently very low, despite the overall situation abroad not being unpleasant. In the key European sales markets for Austrian companies, such as Germany and Italy, industrial sentiment has picked up. What is more, the overall index weighted with Austrian foreign trade is currently way above the long-term average.

"Austrian industry finds itself on a sound growth trajectory after a successful start to 2016. The leading indicators already available point towards a continuation of the modest economic upturn in the coming months, albeit at a slightly slower pace. Hitting a figure of 1.5 percent we expect to see higher economic growth in 2016 overall than was recorded in the previous year", said Pudschedl. That said, the latest Bank Austria Business Indicator suggests that the increase in GDP, totalling 0.6 percent qoq at the start of the year, is likely to contract to some extent in the current quarter. One reason for this is that the growth of the Austrian economy has yet to receive any support from foreign trade. While the Austrian export economy is able to draw on the ongoing recovery in Europe and the sound growth in the USA, as long as there is no pick-up in global economic growth on account of the subdued performance of many emerging markets, Austrian foreign trade will barely be able to exert a positive influence on growth in the country. In some emerging markets though, there are increasing signs that the sluggish growth is starting to come to life, which means the local export economy should encounter stronger demand later on in the year.

Domestic demand and particularly consumption in the Austrian economy are providing the necessary immediate support. The tax reform and the low level of inflation, which dipped below 1 percent yoy on account of depressed commodity prices in the early months of 2016, turned consumption into a key driving force behind growth from the start of the year, and will continue to generate momentum in the coming months. Investment activity will follow, if only to a modest extent. "The poor sentiment in the Austrian economy is limiting the upturn in investments. Discussions about quality of location and the high density of regulation are currently also hampering the willingness to opt for investment capital in Austria", said Bruckbauer. Investments have stagnated in industrialised countries since the financial crisis in 2008/09, and therefore in Austria too, despite the low interest and the predominantly good earnings positions. Companies have become net savers instead of investing. The investment ratio (gross fixed capital formation as percentage of GDP) is currently at a low of 22 percent in Austria, roughly 3 percentage points below its pre-crisis level. "Investment is the key to more growth in Austria, and not just in the short term. As long as there is no tangible increase in investments, there will also be a lack of productivity advances to raise the long-term growth potential of the Austrian economy", said Bruckbauer. After recording annual increases of more than one percent in the 1990s and the early 2000s, factor productivity in Austria is currently trending around zero.

Labour market still unable to fully absorb growing labour supply

The slump in investment activity is at least part of the reason for the tense situation on the Austrian labour market, alongside the rise in workforce potential caused by population growth and migration. "The upturn in the economy in 2016 is too weak to ease the situation on the labour market. The labour supply continues to grow more strongly than employment. Consequently, we anticipate an increase in the jobless rate from an annual average of 9.1 percent to 9.5 percent in 2016", said Bruckbauer. The stability seen on the labour market in the winter months was due to the good weather conditions, and this came to an end at the start of the spring. The seasonally-adjusted figures currently show a slight rise in unemployment again, while employment growth has slowed somewhat.

 tables (PDF; 210 KB)

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