Bank Austria Business Indicator slipped into negative territory in October for first time since February.
Industry wins confidence with support from Europe, but consumer confidence drops to lowest level since the 2009 financial crisis.
Recovery continues in fourth quarter of 2015: GDP growth forecast for the whole of 2015 remains at 0.9 percent.
Return of domestic demand and sustained recovery in Europe will bring higher growth of 1.5 percent in 2016.
Inflation will remain low until New Year. In 2016, tax reform, commodity prices and rise in demand will increase inflation to an average of 1.6 percent.
At the beginning of the final quarter of 2015, the already moderate economic recovery in Austria seems to have lost speed. "The Bank Austria Business Indicator slipped into the red in October. A sharp decline in consumer sentiment has pushed the indicator to its lowest level in eight months, despite the continual increase in confidence within industry", according to Bank Austria chief economist Stefan Bruckbauer’s analysis. In addition to a slowdown of economic activity in Austria in the meantime, the opposing trend in domestic and foreign demand can still be seen in the recent Bank Austria Business Indicator. "The different developments of individual sentiment components highlight the fact that neither consumption nor investment activity have gained momentum, but demand from abroad is slowly increasing. The opposing trends in domestic economic activity and foreign demand appear to have strengthened in Austria for the time being", Bruckbauer believes.
Another sharp fall in consumer sentiment contributed significantly to the decline in the Bank Austria Business Indicator in October compared to the previous months. Austrian consumer expectations have been especially pessimistic for months and have currently fallen back to early 2009 levels. However, business expectations in Austrian industry rose again slightly in October, and are only just below the long-term average. The slowly brightening mood in Austria’s manufacturing sector is mainly due to the cheap European market, which, in addition to the stable recovery in Germany, is due to increasing confidence in important key markets such as France and Italy as well as the periphery and Eastern European markets. "The Austrian economy started cautiously in the final quarter of 2015. But the poor consumer mood in Austria is exaggerated, so we assume that the domestic economy, supported by reviving overseas demand, will enable higher economic growth at the end of the year that is 0.4 percent above the summer quarter", according to Bank Austria economist Walter Pudschedl. After economic growth of an average 0.7 percent in the first three quarters year-on-year, a rise in GDP by 0.9 percent could be possible for the whole of 2015. So the economists at Bank Austria have not changed their growth forecast for 2015 from the beginning of the year.
Austria economic activity has lagged behind macroeconomic development in Austria since the spring of 2014. In the course of 2015, foreign trade has been the sole cause of the marginal growth in GDP. Domestic demand has stagnated so far yoy, but it has revealed a slight upwards movement in the past few months, which stems from the apparently slow increase in investor confidence.
"In 2016, domestic demand will become the main driver of economic growth, and at 1.5 percent will be slightly higher than in the current year. Investment and consumption – supported by tax reform – will generate more momentum", said Pudschedl.
Investment will gain more momentum on the one hand – fostered in the coming year by persistently low interest rates and an expansion of the ECB’s current securities purchasing programme – even if domestic growth will nevertheless be limited because capacity utilisation in the Austrian economy is clearly below the long-term average. On the other hand, consumption in 2016 could provide positive stimulus. The tax reform will bring about a noticeable increase in real pay of an average 2 percent, benefiting mainly lower income groups with a higher consumption ratio. "In 2016, the Austrian economy will be powered by increasing domestic economic activity, and will also gain momentum from the sustained recovery in Europe. The weakness of some emerging markets will probably not endanger the robust upwards trend in Europe in my opinion, especially since solid data from China supports the assumption that the Chinese economy will experience a soft landing", said Bruckbauer. In 2016, the demand for ‘made in Austria’ products will therefore be stronger than in the current year and will contribute to the revival of the Austrian economy. With the growing domestic economy, demand for imports will increase more strongly so that net exports will barely make a direct contribution to the rise in GDP for Austria.
Thanks to low commodity prices, inflation will stay modest in the remaining months of 2015. After an average of 0.9 percent in the first ten months, Bank Austria economists expect inflation of no more than 1.0 percent for the entire year. In 2016, annual average inflation in Austria will rise to 1.6 percent, mainly for three reasons: First, among other things the increase in the reduced rate of VAT as part of the tax reform from 10 percent to 13 percent for selected products will have a small effect on increasing inflation. Second, some demand-induced pressure on prices can be expected with the modest upswing in domestic economic activity; and third, even if there is no robust upwards trend in sight, commodity prices will at least no longer have such a strong dampening effect on inflation in the coming year as they have had in the current year. "While economic growth of 1.5 percent in Austria for 2016 will be slightly lower than the euro area for the third time in a row, the inflation rate will be higher than the European reading for the eighth year in a row", said Bruckbauer, summing up.