The Austrian economy is reaching the peak of its ongoing economic cycle in the current months. This is also true for the European and the global economy. The economic researchers (Statistics Austria and WIFO, the Austrian Institute of Economic Research) expect GDP to grow by 3.2% in real terms in 2018 and by a still respectable 2.2% in 2019.
The most important factors for the acceleration are an improvement in domestic demand and the very good economic performance in our neighbouring countries Czech Republic, Slovakia, and Hungary, and not the least in Germany, our main trade partner.
| 2016 | 2017 expected | 2018 expected | 2019 expected | |
|---|---|---|---|---|
| Real GDP in % | 1.5 | 2.9 | 3.2 | 2.2 |
| Inflation rate (CPI) in % | 0.9 | 2.1 | 1.9 | 1.9 |
| Unemployment rate in % (of employed people) | 6.0 | 5.5 | 5.2 | 5.0 |
| Budget deficit in % of GCP | -1.6 | -0.8 | -0.3 | +0.1 |
Source: Statistics Austria, WIFO
The analysts expect inflation to increase only moderately: +1.9% in 2018 and 2019 after +2.1% in 2017 (CPI), despite the booming economy. The tightening labour market has not had any significant effect on the labour market so far. The public budget benefits from the favourable economy and the decline in interest expense, and government debt in terms of GDP is on the decline. In 2019, the public budget will close in positive territory for the first time (0.1% of GDP).
The monetary policy is getting noticeably more restrictive
The Bank of Japan recently announced that it was considering an exit scenario for its asset purchase programme. The ECB is expected to terminate its programme in the coming twelve months as well. The US Fed is ahead of these central banks and has most recently increased its interest rates by 0.25 percentage points to a range of 1.50% to 1.75% (21 March). The US central bank also announced a new forecast for the Fed funds rate until the end of 2019 in its recent meeting – the rate is expected at 3.4% (!).
New tariffs are negative for the stock exchanges
The trade war that originated in the USA is increasingly burdening the stock exchanges. The risk of an escalation has increased, not the least as the Chinese government will now also levy tariffs on 106 products from the USA. The new tariffs on soy, cars, and chemical products and the harsh rhetoric are bad for financial markets in Asia, Europe, and also the USA.
Technologies shares and financials under pressure
In the past week, technology shares and financials have come under increasing pressure. The technology sector has been pulled down by Facebook – the company’s shares have fallen significantly on unclear questions of the use of user data. The regulatory risk is thus up for many business models in the IT sector, and investors have adjusted their positioning in favour of more defensive sectors. Utilities, telecoms, and real estate shares benefit from the current environment. Banks came under pressure as the possible flattening of the yield curve may affect their profit margins.
ATX with relatively high dividend yield of 2.7%
The ATX, the main index of the Vienna stock exchange, has recorded significant gains on a year-on-year basis. At +22%, it outperformed Nasdaq (+20%), Germany (-0.1%), and the developed stock exchanges worldwide (+7%). However, in the year to date, the performance has been less impressive. The ATX failed to buck the trend of the weak international and European stock exchanges, but it has still posted slightly positive performance figures. The transitional phase from boom to “normal” economic activity amid a more restrictive monetary policy is bumpy and causes volatility to rise.
What remains is the positive corporate earnings trend of listed companies. As long as the company profit outlook remains stable, the share prices will be following this trend. In view of the zero interest-rate policy by the ECB, the dividend yield of 2.7% (as of 31 March 2018) remains a buy argument. As long no recession is foreseeable, dividend titles trump government bonds.
Performance of ATX, DAX, and MSCI World (- 5Y; as of 4 April 2018)
Performance exclusive of fees, duties, and taxes; past performance is not indicative of future developments.
Author:
Paul Severin
Head of Communications Erste Asset Management
Member of the board of OVFA
5 April 2018
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.