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Business Indicator: Modest Acceleration in Austrian Economic Activity Despite Growing Global Risks

Published: April 20, 2016; 19:00 · (FriedlNews)

According to Bank Austria, the Business Indicator rose in March to 0.2 points - back in black for the first time since September. Also, Bank Austria recognized a light improvement in consumer and industrial sentiment. The estimated economic growth in 2016 is 1.5 percent - no further pick-up is expected for 2017.

Modest Acceleration in Austrian Economic Activity Despite Growing Global Risks / Picture: © UniCredit Bank Austria AG

Modest acceleration in economic activity despite growing global risks

- Bank Austria's Business Indicator rises in March to 0.2 points - back in black for first time since September
- Slight improvement in consumer and industrial sentiment
- Domestic demand increases growth in Q1 2016 to 0.5 percent qoq
- Estimated economic growth of 1.5 percent in 2016 - no further pick-up expected for 2017
- Austria exhibits third-highest inflation rate in EU for Q1 - figure of 1.4 percent anticipated for 2016 on average

Bank Austria Business Indicator in positive territory in March

Economic sentiment in Austria has improved slightly again as we move into spring, but it remains at a fairly modest level. Bank Austria's Business Indicator rose to 0.2 points in March, thereby posting a positive reading for the first time since September of the previous year. This is due both to the moderate improvement in consumer sentiment and the more encouraging business assessments from industry.

Sentiment in European industry is mediocre given the ongoing uncertainty on the financial markets and the weak global growth signals, but it has brightened somewhat in most countries just now. EU industrial confidence weighted with Austrian foreign trade thus rose marginally in March, bolstered mainly by better business assessments from the EU periphery and in Central and Eastern European countries. Under these circumstances the sentiment for Austrian industrial companies also brightened up after the sharp setback in the previous month.

Industrial and consumer confidence did improve in March in Austria, but in both cases they still lie well below the long-term average. By international comparison Austrian consumers and industrial companies are actually quite pessimistic. The difference compared to other European countries is reflected almost exclusively in the very weak expectations for the coming months, while views of the current situation are quite good. It is therefore assumed that the recovery in the Austrian economy was reasonably firm during the first quarter of 2016 despite the subdued sentiment which has pushed the Bank Austria Business Indicator down in recent months.

Economic growth likely faster in first quarter of 2016

After GDP growth of 0.2 percent compared to the previous quarter at the end of 2015, the early leading indicators suggest a modest pick-up in economic growth at the start of 2016, primarily caused by consumption – driven by the reform on wage and income tax. What is more, the higher utilisation rate for Austrian industry coupled with the fragile, positive signals from the credit sector point towards at least a modest upwards turn for investments. At the start of 2016 the Austrian economy probably developed better than otherwise suggested by the tense atmosphere and the adverse global impacts. Thanks to sufficient support from domestic demand we expect to see a moderate increase in GDP in the first quarter by up to 0.5 percent qoq. So the Austrian economy started 2016 with growth of roughly 1 percent yoy. This means the Austrian economy expanded faster at the beginning of the year than the 0.9 percent recorded twelve months previously.

Following the fairly solid start to 2016, this moderate upwards trend in Austrian economic activity is set to persist throughout the year. Domestic demand, first and foremost private consumption following the tax reform, will keep the Austrian economy moving in the coming quarters as well. That said, concerns about economic development in the emerging countries have continued to rise in recent months. The economic situation in China, the falling prices of commodities and the turnaround in US monetary policy are the three main economic challenges in the emerging markets with the potential to disrupt global economic activity.

While it is unlikely there could be a global recession triggered by the emerging markets, there has been a noticeable rise in the risk of the global economy possibly losing momentum in 2016. This will probably weigh down on the prospects for the Austrian export economy. For Austria we still anticipate economic growth of 1.5 percent in 2016, even though the forecasting risk has increased in view of the strengthening global headwind. In the coming year too we expect no more than 1.5 percent in GDP growth, while this rate is not likely to pick up any further in 2017 either. The positive effect of the tax reform on consumption will fade in 2017, and will at best be compensated for by more external demand driven by the slight improvement in the global economy.

Moderate rise in inflation during 2016 - still among EUleaders

Inflation in Austria rose to an average 1 percent yoy in Q1 2016, after sitting at 0.7 percent towards the end of 2015. Tax changes like the increase in the preferential rate of VAT as well as the modest recovery in domestic economic activity have more than compensated for the decline in commodity prices. Harmonised consumer prices according to Eurostat also rose on average by 1 percent in the first three months. This means Austria posted the third-highest inflation rate within the EU in the first quarter. Inflation is currently very moderate, and thanks to the lower oil prices in the first six months will hover at just under 1 percent yoy. Only later on in the year will inflation accelerate somewhat faster thanks to a base effect. At 1.4 percent the average annual consumer price increase will be higher than the previous year’s figure. Austria will therefore again have a clear inflation gap to the eurozone. During the last 5 years, prices in Austria have thus risen faster than in the eurozone or neighbouring Germany by almost more than 4 percentage points.

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