Bank Austria Business Indicator:
Austrian economy gaining momentum towards the end of the year
- Higher pace of growth in the Austrian economy: Bank Austria Business Indicator rises to 1.8 points in October, its highest value for three years
- Economic mood in Austria has improved on a broad scale and the international environment is also more positive
- 1.5% increase in GDP in 2016 can be attained thanks to a solid final quarter - after 1% in 2015
- Despite rising inflation, the Asset Purchase Programme of the ECB is expected to be extended – key interest rate will also probably not change in 2017
The domestic economy is gaining momentum towards the end of this year. "After an uneven and very moderate upward trend in the last few months, the Bank Austria Business Indicator rose substantially in October. At 1.8 points, the Indicator has actually climbed to its highest level for around three years", said Stefan Bruckbauer, Chief Economist at Bank Austria. The clear upward trend in the Bank Austria Business Indicator is attributable to a broad improvement in the economic climate in Austria. "For the first time in almost three years, all subcomponents of the Bank Austria Business Indicator improved compared with the previous month. Consumers have become more confident while industrial enterprises, the construction industry and the service sector are benefiting from a more positive economic climate. We therefore expect the Austrian economy to continue its recovery in the final quarter of 2016", said Bruckbauer with confidence.
Highest economic growth on an annual comparison expected in the final quarter
The upswing is continuing thanks to the positive impacts of the tax reform on private consumption, supported by the still low inflation rate despite a slight rise, and the sustained increase in capital investments. However, foreign trade is unable to contribute towards growth at the end of the year since the slight improvement in demand for exports is also contrasted by rising import requirements. "At the end of this year, domestic demand is also providing the Austrian economy with support for a solid growth rate which at 1.7% could even be the highest level in 2016 on an annual comparison. We are therefore still expecting a 1.5% rise in GDP for 2016 as a whole", said Bank Austria Economist Walter Pudschedl. Economic growth in 2016 will therefore be much higher than the 1% increase in the previous year.
Domestic demand set to remain the determining factor in 2017
Although the Austrian economy will continue on a solid recovery path in 2017, the growth risks have increased according to an estimate by the Bank Austria economists. The stimulus produced by low material prices, the devaluation of the Euro and a very accommodating monetary policy will weaken next year. The uncertainty caused by the Brexit decision in the United Kingdom, the presidential election in the USA and also the parliamentary elections in Germany could have an impact. Investment activity in Austria will lose some momentum in 2017. Whereas the prospects for building investment are at least stably favourable, this is due to the lower rate of equipment investment. Supported by the substantial rise in employment, private consumption will remain an important driving force behind economic growth although more restrained dynamism is expected in 2017 compared with this year. Although the positive effects of the tax reform will still continue to have an impact, they will then decrease. Higher inflation will also reduce purchasing power, especially since the currently negotiated wage agreements will probably not produce any complete real compensation.
Domestic demand in 2017 will remain the sole growth driver in the Austrian economy because the external sector will probably still be unable to make a contribution. The prospects for exports are cautious on account of increasing protectionist measures in world trade, growing uncertainties and unchanged geopolitical problems although emerging markets might produce a positive surprise in regard to demand. In the light of the continuing rise in investments and consumption, exports will at any rate be confronted by a further increase in demand for imports in the Austrian economy. "Due to the fall in domestic demand and the continuing low level of exports, we are anticipating economic growth in 2017 to be lower than this year. In view of the current improvement in the economic mood and the surprisingly robust growth path despite increasing uncertainties, a growth rate in excess of 1% is nevertheless expected in 2017" said Pudschedl
No rise in the key interest rate in the euro zone in 2017, increased opportunities for a rate hike in the US
Following a stable low phase in Austria in the middle of the year, inflation has been rising since September. The decreasing dampening effect of the sharp fall in the oil price as well as the turnaround in raw material prices pushed the inflation rate in October above 1% on an annual comparison, and will also provide additional impetus in the next few months. "For 2016 as a whole we are expecting - just like the previous year - an average inflation rate of 0.9%. However, the upward trend, which has been noticeable since September, will continue in the coming months. In 2017 as a whole, inflation will therefore probably double to a rate of 1.8%", said Bruckbauer.
Since the core inflation rate in Austria, just like in the euro zone as a whole, will largely remain stable, the ECB will probably observe the rising overall inflation rate in 2017 without too much concern. "Despite the increase in inflation, we expect the ECB to announce further monetary easing measures In December. The existing Asset Purchase Programme is likely to be extended beyond spring 2017. We are also assuming that the European key interest rate will not change in 2017", said Bruckbauer. In the USA the election of Donald Trump as the new president has increased the probability of another interest rate hike in December contrary to the previous estimate. Depending on developments on the stock market, the anticipated interest increase path could even be slightly steeper than what was previously assumed.
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Enquiries: Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel. +43 (0) 50505 - 41957;