Bank Austria Business Indicator:
Sharp economic upturn marks the start of the year

  • Bank Austria Business Indicator off to a good start in the new year, climbing to a five-year high in December 2016 for the first time since mid-2011
  • Rise in the business indicator driven by significant improvement in domestic consumer sentiment at year-end
  • A surge in the final quarter of 2016 resulted in estimated economic growth of 1.5 per cent, after 1 per cent in 2015
  • Buoyant start to 2017: 1.6 per cent increase in GDP expected for the year; domestic demand boosts recovery; outlook for exports improved
  • Inflation in Austria still among the highest in the EU: After an annual average of 0.9 per cent in 2016, price increases are set to double in 2017 to 1.8 per cent
  • Austrian households that buy heating oil and fuel to spend an extra 140 and 120 euros respectively on average in 2017 due to rise in oil prices

The Austrian economy finished last year on a high. The economic tailwinds experienced in recent months were even stronger towards the end of 2016. “The Bank Austria Business Indicator rose to 2.2 points in December 2016, reaching its highest level for more than five years. Austrian consumers and producers are optimistic about 2017”, says Bank Austria Chief Economist, Stefan Bruckbauer. The indicator climbed to an average of 1.9 points in the fourth quarter of 2016. “Based on the Bank Austria Business Indicator’s sharp upturn in the final quarter, when it reached a five-year high, we expect to find that the Austrian economy grew significantly in the fourth quarter of 2016 compared to the previous quarter”, says Bruckbauer in his analysis, adding: “Despite many political uncertainties, particularly in the second half of the year, economic growth for the whole of 2016 was estimated at 1.5 per cent, thereby surpassing by some margin the 1 per cent increase of the previous year.”

Economic sentiment in Austria currently better than the European average
The Austrian economy starts the new year in markedly improved circumstances. “An improvement in domestic consumer sentiment was a crucial factor in the rise in the Bank Austria Business Indicator in December. After two years characterised by increasing pessimism, domestic consumers’ confidence grew once more, bolstered by the positive effects of tax reforms and stabilisation of the labour market in 2016. For the first time since the end of 2014, consumer sentiment at the turn of the year is actually better than the European average”, notes Bruckbauer.

This improved sentiment is reflected in higher consumer demand, giving further impetus to the service sector. The business outlook for the construction sector has stabilised at a decent level, boosted by a satisfactory order book at year end. Conversely, optimism in the domestic industrial sector declined slightly in December, but the situation continues to be regarded as better than average compared to previous years.

“Sentiment in the domestic economy improved a great deal during 2016. Calculated across all sectors, it is actually better than the European average for the first time in two years”, says Bruckbauer. In this respect, only the domestic industrial sector is slightly lagging behind at present. However, the rise – weighted by Austrian foreign trade – in the level of international industrial confidence, triggered by positive stimuli from the US economy and some emerging countries, as well as from most of the European partner countries, should allow sentiment in the export-oriented domestic industrial sector to reach European levels again soon.

Economy remains strong at the start of 2017
Bank Austria’s economists believe that the economy remains on track at the start of 2017. Domestic demand will continue to drive economic growth. However, the boost to consumption resulting from the tax reforms of 2016 will taper off during the year. Higher inflation will also put pressure on domestic demand. Furthermore, in an environment characterised by a number of political uncertainties, investment will be unable to sustain the momentum of the previous year.

That said, the latest leading indicators suggest that the world economy has been picking up in recent weeks. The economic situation in many emerging markets is improving, and the US economy will be further fuelled by fiscal stimuli in 2017. The outlook for global trade has improved, and this should benefit the Austrian economy. “While economic growth was propped up solely by domestic demand in 2016, in 2017 foreign trade will once again play a vital role in increasing Austria’s GDP. All things considered, compared to the previous year, we are expecting slightly higher economic growth of 1.6 per cent in 2017. Slightly stronger global demand will assist domestic export businesses more than in the previous year and will compensate for diminishing tailwinds through consumption and investment”, says Bank Austria economist, Walter Pudschedl.

The downside risks associated with the forecasts are considered to be higher than in 2016 in view of uncertainties such as the forthcoming Brexit negotiations, unexpected economic policies pursued by the US during Donald Trump’s presidency, particularly with regard to the possibility of increasingly protectionist trends affecting world trade and the economies of emerging countries, as well as the results of elections in Europe, including those in France and Germany. Bank Austria’s economists reckon that the economy will lose a bit of momentum next year (2018). The slowdown in GDP growth to 1.4 per cent is attributable to further weakening in domestic demand, although the slight upward trend in exports should continue.

Rising oil prices put pressure on consumers
Inflation increased significantly at the end of 2016 when crude oil prices changed direction. Year-on-year inflation was approximately 1.5 per cent in December. “Consumer prices rose at an estimated annual average rate of just 0.9 per cent in 2016. But that still puts Austria among the countries with the highest rate of inflation in the eurozone in 2016 and in the previous years – surpassed only by Belgium”, concludes Pudschedl. Prices in the eurozone rose by an average of 0.2 per cent year-on-year in 2016. The higher rate in Austria is attributable, for the most part, to bigger price increases for services such as hospitality, leisure and cultural activities. Fairly big rent increases also had an adverse effect.

The upward inflationary trend will continue at least until the spring, and only then stabilise at just under 2 per cent year-on-year. “We expect inflation to double to 1.8 per cent in 2017. In view of trends in the prices of raw materials and the current weakening of the euro against the US dollar, the sharp rise in prices in 2017 will be largely attributable to external factors. Conversely, demand-driven pressure on prices remains stable and core inflation will continue to be in the region of 1.5 per cent”, says Pudschedl.

Assuming that oil prices continue their modest rise to around 60 US dollars a barrel at the end of the year, average oil prices calculated in euros will be about 30 per cent higher in 2017 than the annual average in 2016. Oil prices alone will therefore add about half a percentage point to the rate of inflation in 2017. By way of contrast, the oil price trend in 2016 curbed inflation in Austria by 0.3 percentage points. Every Austrian household that runs a motor vehicle will have to budget for additional annual average fuel costs of roughly 120 euros in 2017 due to higher oil prices. For the 15 per cent (or thereabouts) of households that use oil-fired heating systems, the additional financial burden due to higher heating oil prices is in fact more than 140 euros per year. However, Austrian households’ expenditure on heating oil and fuel will still be less than the 2015 annual average, despite the additional burden compared to the previous year.


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