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15.07.2016

Bank Austria Business Indicator:
Austrian economy picks up before Brexit decision

  • Bank Austria Business Indicator reveals faster economic activity in June with a clear rise to 0.8 points: better sentiment in industry and among consumers
  • GDP growth of 1.5 percent still expected for 2016, but estimated economic growth in 2017 reduced from 1.5 to 1.1 percent - Brexit to hamper investments and exports
  • Brexit will hit growth in Austria to the tune of around half a percentage point in gross terms over two years
  • Inflation forecast for 2016 remains at 1.1 percent – inflation expectations for 2017 down 0.1 percentage point to 1.8 percent
  • ECB will not lower interest after Brexit, but quantitative easing likely to be extended

The economic climate in Austria noticeably brightened around the middle of the year. "Bank Austria's Business Indicator rose to 0.8 points in June prior to the Brexit decision, after 0.4 points in the previous month. The indicator has thus reached its highest point in two years, signalling an acceleration in growth in Austria at the mid-way point of 2016", said Bank Austria chief economist Stefan Bruckbauer. The improvement in June's economic climate was broadly based. Every component of Bank Austria’s Business Indicator clearly pointed upwards. "The prolonged slump in sentiment in Austria began to reverse in June, pulling Bank Austria's Business Indicator up with it. Both consumers and industrial companies have become noticeably more optimistic. That said, the sentiment indicators underlying the calculation do not yet reflect the impacts of the British decision at the end of June to leave the European Union", concluded Bruckbauer.

While economic activity has recently picked up again, the growth rate of the Austrian economy in the second quarter probably lagged somewhat behind the early-year pace overall. "In the first half of the year the Austrian economy posted GDP growth of almost 1.5 percent yoy, thereby easily beating last year's figure of 1 percent. This trend in the first half year included a continuation of the acceleration in domestic demand, which therefore became a driving force of the economic recovery, as in most other European countries, while foreign demand made no contribution to growth on a net basis in what is a difficult global environment", said Bruckbauer. In spite of the initially negative consumer sentiment, consumption in particular did help the recovery in the first six months, boosted by a more stable labour market, low inflation and especially the reform of wage and income tax. The initial scepticism among the population about the positive impacts of the tax reform slowly seems to be abating. After all, consumer sentiment in June improved to its highest reading in two years. The brighter sentiment in almost every European country and in Austria supported an acceleration in investment. Increased expansion investments were carried out particularly in equipment, first and foremost machinery and vehicles. Construction investment dynamics still lagged somewhat behind, but have been trending upwards again since the start of the year following almost two years of decline.

"In the second half of the year the growth rate of the Austrian economy will be dampened by the uncertainty caused by the decision in the UK to leave the EU. Overall, the somewhat weaker growth in the second half of the year will be compensated by the economic development in the first half of the year, which exceeded our expectations, which means we still predict economic growth of 1.5 percent for 2016 as a whole", forecasted Bank Austria economist Walter Pudschedl.

Unemployment rate rises more slowly in 2016 than expected

The recovery in economic activity in the first six months has bolstered stability on the labour market. In the middle of 2016 the seasonally-adjusted jobless rate sits at 9.1 percent, unchanged from the start of the year thanks to a robust increase in employment by 1.5 percent yoy and a somewhat slower increase in labour supply. "The faster growth rate checked the upwards trend in the unemployment rate in the first half of the year. Consequently we have lowered our annual average unemployment projection for 2016 from 9.5 to 9.3 percent", summarised Pudschedl. After the improved growth performance we now expect 2016 to produce a higher increase in employment than 2015; however, given the faster increase in workforce potential likely in the second half of the year this will not be enough to prevent a rise in unemployment compared to 2015.

Inflation to pick up in second half of year

Inflation has been trending upwards in Austria again since May. In the first six months though, average inflation still amounted to just 0.8 percent yoy. This upwards movement in Austrian inflation will continue to gain ground in the coming months due to a base effect brought on by the sharp decline in the price of oil last autumn. "For 2016 as a whole we assume inflation will average out at 1.1 percent. For 2017 we have lowered our inflation projection by 0.1 percentage points to 1.8 percent, since the Brexit decision suggests we will see slightly lower global demand and somewhat weaker upwards pressure on commodity prices", explained Pudschedl.

Brexit subdues growth prospects, especially for 2017

The adverse impacts of Brexit on investment activity and export demand will come stronger to the fore in 2017. The United Kingdom is Austria’s eighth most important export partner, and in terms of added value it is even the sixth most significant export country after Germany, the USA, Italy, France and China. Roughly 1.5 percent of Austrian economic output depends on exports to the United Kingdom. However, the indirect effects via Austria's most important export partners, like Germany and France, but also the CEE countries, could turn out to be just as negative for the Austrian economy as the direct impacts. "We have lowered our GDP projection for 2017 from 1.5 to 1.1 percent. By our calculations the Brexit decision in the United Kingdom will cost the Austrian economy half a percentage point in growth over both 2016 and 2017 in gross terms", said Bruckbauer. This means Austria will not be as affected by Brexit as much as many other European countries. However, if the uncertainty persists, the decline in expected growth could turn out to be even greater. At any rate, the implications of Brexit for the Austrian economy are manageable in the medium term, but they remain dependent on the political consequences of such decision. Thus much will be determined by how politics handles the Brexit vote.

ECB likely to extend quantitative easing

The Brexit decision in the United Kingdom could put the ECB in a tight spot again over the coming months. "In spite of the higher downside risks for growth and inflation in the euro area caused by Brexit, we do not believe the ECB will lower its base rates any further. In our view, the side effects would be more severe than any positive impacts", emphasised Bruckbauer. According to economists at Bank Austria, however, a combination of weaker growth, slightly lower inflation and greater risks to financial stability would probably prompt the European Central Bank to extend its quantitative easing measures by six months to at least September 2017.

 

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Enquiries: Bank Austria Economics & Market Analysis Austria

Walter Pudschedl, Tel. +43 (0) 50505 - 41957;

E-mail: walter.pudschedl@unicreditgroup.at