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15.06.2016

Bank Austria Business Indicator:
Pick-up in domestic demand facilitates higher growth in 2016 – in spite of elevated global risks

  • Bank Austria Business Indicator makes progress in May: better sentiment in industry and among consumers
  • Good start to the year will not be replicated again: GDP growth still expected to be 1.5 percent in 2016 thanks to faster domestic demand
  • Inflation bottoms out in Austria, but remains above eurozone average
  • External demand offers little stimulus: limited global growth prospects thanks to risks like US interest rate policy and China
  • BREXIT scenario would be negative for EU and Austria – UK could even slip into recession

Following a slowdown at the start of the second quarter the Austrian economy has picked up some pace again. "The downturn in April was followed in May by a clear improvement in the Bank Austria Business Indicator. Volatile development comes as no surprise amidst the fragile global growth conditions at present. At any rate, the current increase to 0.4 points indicates that the Austrian economy continues to recover", said Bank Austria chief economist Stefan Bruckbauer. Economic growth this quarter, however, will lag behind the robust start to 2016 with GDP growth of 0.8 percent qoq. "In early 2016, economic growth likely reached its highest point of the year. Moving into the second quarter the Austrian economy was initially sluggish. Yet the Bank Austria Business Indicator demonstrated more momentum again in May, which should be reflected in a renewed acceleration of the Austrian economy in the second half of the year. This growth will not match the pace of the first quarter though", said Bruckbauer.

The somewhat improved growth outlook signalled by the latest Bank Austria Business Indicator at the start of the summer is the result of a modest pick-up in economic sentiment. "Economic sentiment in Austria improved on a broad scale in May. Both consumers as well as industry are somewhat more optimistic about the future, even if Austrians in general are still much more sceptical than the rest of their fellow Europeans", revealed Bank Austria economist Walter Pudschedl. The relatively stable situation on the labour market in previous months coupled with the tangible effects of the tax reform have raised the mood of Austrian consumers to at least the level of summer 2015. Bolstered by positive data from Europe, the business assessments of Austrian industrial companies also improved in May.

"Following the robust start to the year and boosted by the recent pick-up in sentiment, the Austrian economy remains on course to record economic growth of 1.5 percent in 2016. Thanks to the revival of domestic demand, GDP growth will thus surpass the previous year’s figure of 0.9 percent", added Pudschedl. The tax reform has clearly had a positive impact on private consumption. What is more, the spending on refugees that raises the deficit also comes as a boost to growth. For the first time in three years, investment activity is noticeably driving the Austrian economy forward again. The upwards trend in plant and equipment investment will increasingly be supported by construction investments in the latter part of the year. While domestic demand is defining economic growth, net exports may make no contribution to this growth in 2016. On the contrary, foreign trade may well drag growth down marginally in 2016 on account of higher imports.

Inflation rises again
The decline in inflation over the first months of the current year likely drew to a close in May, affected by the lower oil prices compared to the previous year. In the first five months, average inflation amounted to 0.8 percent yoy. From autumn onwards, the Austrian inflation rate is expected to post a clear increase. With the price of oil having risen to roughly USD 50 per barrel, and a base effect caused by the sharp decline in the oil price from the autumn of last year, inflation in Austria will rise towards 2 percent yoy by the end of the year. "For the year as a whole we currently assume inflation will average out at 1.1 percent in 2016. This means that inflation will come in marginally above last year’s figure of 0.9 percent, but clearly higher than the expected EU average of just 0.2 percent", said Pudschedl. Driven by rising rentals as well as hotel and restaurant prices, inflation in Austria will exceed the eurozone average for the fourth year in a row.

Multitude of outlook risks limit prospects
Looking at the current global conditions there is still a lack of demand support for the Austrian economy. Global growth is fragile. Although developed countries like the USA and in Europe are continuing down their robust growth path, which has a positive impact on demand for products that are made in Austria, there is no additional stimulus from the emerging markets. There is no acceleration of global economic activity expected in the coming months, and a variety of risks continue to limit future prospects. Alongside the restructuring of the Chinese economy, further interest rate hikes by the US Federal Reserve constitute another risk to economic activity. Furthermore, geopolitical risks, such as the Syrian conflict, the handling of refugees in Europe and the forthcoming US presidential election represent potential stumbling blocks for the economy.

BREXIT bad news for UK and for Austria
All eyes next week will be on the referendum about the UK possibly leaving the European Union, which represents a significant political risk for the European economy and therefore for the Austrian economy. "In my view, Brexit would be an economic disaster for the UK. Some of the consequences would be a devaluation of the pound, a rise in inflation and a recession. Brexit would also have massive implications for the EU with adverse economic consequences, but from Austria’s perspective at least they would be manageable", said Bruckbauer. In the short term, the burgeoning uncertainty would result in turbulence on the markets, seriously affecting countries on the EU periphery and states in Central and Eastern Europe. As a country heavily committed to CEE, this would make Austria vulnerable to disruptions. "Growth of 1.5 percent for Austria in in 2016 would be jeopardised if the British decide to leave", added Bruckbauer. In the long run, trade and investment ties, the entanglement of labour markets (migration) and dependency on EU funds will play a role in the assessment of possible impacts. Austrian exports of goods and services to the UK only amount to around 1.6 percent of total exports. These relatively weak economic ties with the United Kingdom and the position as a net payer to the European Union would make the long-term economic implications of an EU exit manageable for the Austrian economy. Only Finland and Italy would be less affected within Europe, while Ireland stands to lose the most. The reaction of the EU will determine what negative political impacts a Brexit would have for Europe.

 Charts (PDF; 338 KB)

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