Austria’s economy – a positive surprise

29.6.2017

Austria's economy – a positive surprise

• Austria with strongest growth since 2011
• Upswing in CEE is growing
• Inflation dynamics temporarily weakening
• ATX: Focus back on Austria

On 28 June 2017, Raiffeisen RESEARCH, an organizational unit of Raiffeisen Bank International AG (RBI), published the two capital market strategies "Austria & CEE^[1]" and "Global Markets" for the third quarter of 2017. At a press conference, chief analyst Peter Brezinschek and Bernd Maurer, chief analyst of Raiffeisen Centrobank AG (RCB), both paid particular attention to the surprisingly strong economic development in CEE as well as the inflation trend.

“GDP figures for the first quarter have positively surprised in several countries of Central and South Eastern Europe. Romania, Poland, Hungary and the Czech Republic in particular posted strong growth. Austria also reported increasing growth dynamics and left the euro area behind for the first time in many years. As a result, we have moderately raised our GDP forecasts for 2017 as a whole. With a GDP increase of 2.2 per cent, Austria should have the strongest growth since 2011,” says Brezinschek.

 

CEE started strongly into the year

In Central Europe (CE), mood indicators such as the purchasing managers' indices (PMI) have reached a level in the first half of the year which indicates a more distinct economic growth. On average, the PMI for Poland, Hungary and the Czech Republic reached almost 56 points year to date, well above the neutral 50 points. The optimism of entrepreneurs in Germany, where the purchasing managers' index has risen to nearly 60 points, is supportive. The composition of recent growth is broadly based on rising private household demand, investment growth (especially in Hungary) and foreign trade (especially in the Czech Republic and Slovakia). "This development has prompted us to increase our average growth forecast for the CE region for this year from 3.1 per cent to 3.6 per cent. We are also expecting growth of over 3 per cent for the coming year, "says Brezinschek.

The situation is similar in South-East Europe (SEE). The largest economy in the region – Romania – is booming. Above all, domestic consumption is driving the economy. While economic dynamics remain unbroken in Bulgaria, the momentum of growth on the West Balkans is diminishing. Both in Serbia and Croatia, slightly lower growth rates were achieved compared to the previous quarter. In Croatia, the bankruptcy of Agrokor, the country's largest company, also weighs on growth prospects. "We therefore reduced the forecast for Croatia for the current and next year by 0.5 percentage points. Nevertheless, our economic forecast for the SEE region continues to rise overall, from 3.7 per cent to 4.1 per cent in 2017. We also expect strong growth of 3.5 per cent for 2018, "explains Brezinschek.

In Eastern Europe (EE), the end of the recession in Russia is particularly noteworthy. “We have not yet adjusted our growth forecast for the full year 2017, leaving it at 1.0 per cent, but it is possible that this value will be exceeded. The latest data releases for May indicate a strong second quarter. The economic situation is also brightening up in Belarus. While we had expected a recession only three months ago, the economy has now returned to weak growth. Only in Ukraine have the prospects somewhat dimmed based on the economic blockade of the Donbass. All in all, as far as the economic outlook for the EE region is concerned, we stick to a modest economic recovery of 1 per cent in 2017 with an upward trend in 2018, “says Brezinschek.

 

Austria's upswing is gaining in breadth

The cyclical dynamic in Austria accelerated again at the beginning of the year. The annual growth rate of 2.3 per cent recorded in the first quarter, compared with the previous year, was as high as in spring 2011. Private consumption also developed comparatively dynamically at the beginning of the year. As in the previous quarters, gross fixed capital formation also supported quarterly growth in the first quarter. A positive contribution to growth also came from foreign trade, as exports were again benefiting from a positive external economic environment following a disappointing development in 2016. In addition to the positive cyclical dynamics of the past quarters, the outlook for the coming months continues to be favorable. Both the purchasing managers' index for the manufacturing sector and the economic confidence determined by the EU Commission recently recorded above average for the first quarter, which in itself suggests another rebound in the cyclical pace. "Against the backdrop of the solid economic development of the past quarters as well as the positive outlook, we have raised our GDP growth forecast for the full year 2017 from 1.7 per cent to 2.2 per cent (2018: from 1.5 per cent to 1.7 per cent). The Austrian economy would therefore record the highest annual growth since 2011 (2.8 per cent). The cyclical dynamics should be more broadly based in this and the coming year than in 2016 and, in addition to domestic demand, should also be supported by foreign trade, "Brezinschek is optimistic.

 

Inflation dynamics weaken

Inflation in Austria is expected to have reached its provisional high at 2.4 per cent in February. "We expect an average inflation rate of 2.0 per cent for 2017 as a whole (2018: 2.1 per cent). Although the development of oil prices has now had a much lesser (exacerbating) effect on inflation than just a few months ago, a moderate increase in the price pressure resulting from the core rate is still expected not least due to the good economic development, "says Brezinschek.

After the sharp rise in inflation rates in CE/SEE by the energy price effect at the beginning of the year, the situation has also calmed down somewhat. In some countries the peak of inflation was reached in March. In Russia, the path of declining inflation has continued. The central bank target of 4 per cent is almost reached.

 

Specialist shortage in the USA

In the US, annualized real GDP grew by only 1.2 per cent in the first quarter. For the second quarter, however, a markedly stronger increase in economic output is apparent on the basis of the "hard" data already available. Positive impulses are likely to come from private consumption spending, which had hardly picked up at the beginning of the year. Raiffeisen RESEARCH also expects a healthy increase in investments. "Our forecast of an increase in real gross domestic product of 2.4 per cent in the current year appears to be only slightly on the optimistic side," says Brezinschek. The dynamics in the employment structure have thus diminished noticeably since the beginning of the year. On average, 224,000 new jobs were filled in January and February, while the average between March and May was 121,000. However, there is some evidence that the slowdown in the employment structure is not due to lower demand for labor but, on the contrary, a lack of qualified applicants.

 

Oil price: Focus on stock reduction

At the end of May, the OPEC member states met in Vienna to decide on their further strategy regarding the reduction of output decided at the end of 2016. Ultimately, the meeting did not result in a great surprise. As announced in advance, the OPEC countries as well as eleven non-OPEC countries agreed on an extension of the reduction by nine months until the end of March 2018. The main goal during this period is to ensure a lowering of the still ample global oil reserves to the average of the past years. “We expect the Brent price to move between USD 54 and USD 62 per barrel for the second half of the year,” says Brezinschek.

 

Foreign exchange markets: Monetary divergence initially speaks for the US dollar

As a result of the ECB's interest rate meeting on June 8 and the Fed's on 14 June, the US dollar's short-term and medium-term prospects have brightened. ECB President Mario Draghi thereby disappointed market players who had bet on the announcement of a timeline for the withdrawal from the bond purchases or even for a first interest rate hike. On the other hand, the Fed reiterated its intention to continue raising the benchmark interest rate in the coming quarters. "An ECB that continues to buy bonds and leaves the benchmark interest rate unchanged at 0 per cent is therefore facing a Fed that keeps raising the benchmark interest rate and selling bonds. We believe this should be reflected in a spread increase the between two-year German and US government bonds. This in return should boost the US dollar in the coming months. By December, we see EUR/USD at 1.07," says Brezinschek.

 

Bond and stock markets

According to Raiffeisen RESEARCH, the upward trend is still intact on the American equity market in view of the solid fundamentals (economic activity, profit growth). In the summer months, however, the increased valuations and the Fed's measures should initiate a consolidation movement. In Europe, the robust cyclical dynamics and the expected earnings increases are basically the main reasons for a continuation of the uptrend for the Euro STOXX 50 and the DAX. Since the valuations have attracted considerable attention recently and the investors have already priced in a lot of positive results, a better entry point is likely to arise in the summer months.

The euro government bond market was characterized by high nervousness and markedly increased risk premiums up to the end of April in the context of the French presidential election. The victory of Emmanuel Macron turned the risk sentiment into the positive. The political risks were quickly and massively outpriced. After the "Macron rally", Raiffeisen RESEARCH sees little more potential downside for the risk premiums of most euro area countries. As of September, political risks could once again become the focus. The greatest risk continues to be from Italy. The political situation is particularly unstable here and has the potential to turn into a systemic crisis.

 

ATX: Austria back in focus

An increase of almost 20 per cent since the beginning of the year shows the ATX among the best developing European stock indices. It has been one of the outperformers in Europe since 2015, and the outperformance has really gained momentum since the second half of 2016. The strong development is due, among other things, to the significantly improved perception of the CEE region. Higher economic growth than in the euro area creates confidence, and this positively affects the Austrian stock market due to the high sales exposure of Austrian companies. A further point is a slightly improved environment for the financials weighted in the ATX as a result of rising expectations. In addition, it is often the case that, in the case of an advanced upswing in the leading exchanges, investors' interest in smaller markets is increasing. Currently, the ATX is valued at a P/E ratio of 13.6 for 2017 and 12.7 for 2018. A level that RCB considers appropriate and that is equivalent to a discount of more than 10 per cent compared to the broad European market. RCB's analysts forecast the ATX slightly higher at 3,250 points for the end of the year, although there is a slight setback potential over the summer months.

 

Financial analyst: Peter Brezinschek, RBI Vienna