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16.08.2016

Bank Austria Business Indicator:
No sign of effects from Brexit thus far: Austrian economy gains momentum in summer

  • Bank Austria Business Indicator climbs to 1.0 points: Improved consumer sentiment results in best reading in over two years
  • Following lacklustre spring, solid growth expected in third quarter – GDP forecast for 2016 unchanged at 1.5 per cent
  • Economic effects of Brexit decision not expected to be felt until around the turn of the year – economic growth for 2017 projected to be lower than this year at 1.1 per cent
  • Unemployment rate expected to rise in second half of 2016 – significant expansion of labour supply main factor behind poor performance of domestic labour market compared with other European countries

"The recovery of the Austrian economy continues. The Bank Austria Business Indicator rose for the third month in a row in July. At the current reading of 1.0 points, our indicator reached its highest level in over two years," reported Stefan Bruckbauer, chief economist at Bank Austria. The Bank Austria Business Indicator has been on an upward trend since the beginning of the year. And it has exhibited an even more robust improvement since the start of the second half of the year, which suggests an acceleration of economic output in the third quarter. "Following the rather lacklustre economic development in the spring, the current Bank Austria Business Indicator now points to a considerable economic upswing over the summer. The uncertainty caused by the Brexit decision in Great Britain has not had a negative impact thus far," said Bruckbauer.

"Economic growth for the third quarter is expected to be as high as 0.4 per cent in quarter-on-quarter terms," explained Bank Austria economist Walter Pudschedl, adding, "Following the strong start to the year and the increase in momentum over the summer, we still expect economic growth for 2016 as a whole to come in much higher than last year at 1.5 per cent, although the uncertainties caused by the Brexit decision will dampen the recovery somewhat at the turn of the year."

Consumers more optimistic, industrial sentiment robust
The brighter economic climate prevailing at the start of the second half of the year, which is reflected in the current Bank Austria Business Indicator, is primarily due to the improved sentiment among Austrian consumers. Although sentiment is still subdued, the stabilisation of the labour market since the beginning of the year and the income tax reform amidst low inflation have helped it bounce back from its low point and given consumers a more positive outlook on the situation than has been seen in roughly two years. In contrast, Austrian companies' assessment of business conditions did not improve further in July, although the signs coming out of Europe are positive. The European sentiment indicator weighted with Austrian foreign trade climbed to a two-year high, driven by the persistently positive development in Germany and an improvement in Italy as well as in the majority of the Eastern European EU member countries.

The calm before the storm?
In Europe, economic sentiment has been largely unaffected by the Brexit decision thus far, although it has deteriorated substantially in the British Isles. While the turbulence on the capital markets has blown over again and the negative effects are apparently being ignored by market participants, the fact that Brexit will not be completed without economic ramifications is already evident in the sentiment indicators as well as in trade, on the real estate market, and not least in the depreciation of the British pound by roughly 10 per cent. "We believe that the effects of the Brexit decision on the European economy and on Austria will be felt most strongly around the turn of the year from 2016 to 2017. An economic storm is not looming on the horizon, but the ongoing recovery will take a hit. Economic growth will decline from 1.6 per cent in 2016 to 1.0 per cent in 2017 in the Eurozone and from 1.5 per cent to 1.1 per cent in Austria," stated Bruckbauer. Both foreign trade and investment activity will be more subdued due to the new framework conditions. The persistently strong consumption will not be enough to offset this.

Unemployment rate to rise in second half of the year
The stabilisation of conditions on the labour market that has been seen since the beginning of 2016 is at an end. Austria's unemployment rate started to rise again in July. Along with Luxembourg and Finland, Austria is one of three countries in the European Union that have a higher unemployment rate than three years ago in mid-2016 despite the economic recovery that started in the spring of 2013. In Finland and partially in Austria, this can be attributed to below-average economic development. As in Luxembourg, however, the rise in unemployment in Austria is mainly due to the robust expansion of the labour supply. According to Eurostat data, the labour supply in Austria has increased by 60,000 people, or 1.4 per cent, since 2013, while the EU average has only advanced by 0.8 per cent. In Austria, the rise is solely due to an increase in foreign workers, while the number of domestic workers has actually declined slightly. The unemployment rate, which is above 6 per cent at the middle of 2016 according to Eurostat and is thus around a percentage point higher than three years ago, would be roughly 0.6 percentage points lower if Austria's labour supply had only risen in line with the EU average.

"Although the economic recovery is continuing, the unemployment rate is expected to rise in Austria in the coming months due to the slight acceleration of the growth in the labour supply caused by the increase in the number of people with asylum status or subsidiary protection on the labour market. We expect the average annual unemployment rate for 2016 to rise to 6.1 per cent, or 9.3 per cent according to the national definition," projected Pudschedl. The growth in the labour supply will be influenced by very different trends in the unemployment rate in the provinces. While the average annual unemployment rates for the western provinces are expected to decline slightly in 2016 compared with the prior year on the back of somewhat higher economic output, the stronger growth in the labour supply will push unemployment rates higher in the eastern provinces. The unemployment rate will increase significantly in Vienna in particular, reaching a record level of roughly 14 per cent.

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