In 2022, Austria's gross domestic product (GDP) increased by 5% compared to the previous year. In the meantime, economic growth has weakened significantly, but economists expect growth rates in Austria to pick up over the course of the year. The labour market remains robust and energy costs have fallen significantly.
High inflation comes as a burden
Although the prices of cyclical price drivers such as oil or gas have fallen, the inflation rate in Austria remains about two percentage points higher than the Eurozone average. Thus, the two Austrian economic research institutes have revised inflation expectations upwards. The Institute for Advanced Studies Vienna (IHS) expects consumer prices to rise by 7.5% (December: 6.7%) this year, while the Austrian Institute of Economic Research (Wifo) is slightly lower at 7.1% (6.5%).
The general price increase has translated into core inflation (excluding food and energy prices, which are prone to fluctuation). Among other things, the relatively high settlements of the collective labour agreement and expected rent increases, which are linked to the consumer price, are responsible for this situation.
High inflation, if it persists over the long term, can become a burden on the economy and the population. The cost of living rises, and the central bank has to raise interest rates to contain inflation. This has an unfavourable effect on lending and consumption.
Volatile equity market
The recent bank confidence crisis, the stronger US dollar and higher yields have had a dampening effect on the markets. In addition, robust economic data have raised expectations of further interest rate hikes. This scenario notwithstanding, growth shares have recovered some of the losses they incurred last year. Unfortunately, the domestic stock market holds too few representatives of this category of equities.
Analysts have significantly reduced company earnings estimates in the year to date. Above all, cyclical consumer and industrial equities, but also the basic industry and the healthcare sector have been affected by above-average negative earnings revisions.
Since the beginning of 2023, the leading index ATX has been more or less treading water, although the stock market barometer has recently picked up again. Erste Group's Research rates the ATX index as oversold. Compared to other European indices, there is catch-up potential.
Equity outlook should brighten in the course of the year
The interest rate markets have also begun to price in a weaker economic development. This has manifested itself in the expected key-lending rates, which have fallen in recent weeks. Although the market is still pricing in interest rate hikes in March and May, market participants are expecting to subsequently see significant cuts again.
The central banks in Europe and the USA are accepting lower growth in order to reduce inflation. In this environment, the events surrounding Silicon Valley Bank and Credit Suisse also have a positive aspect.
For equities, an end to interest rate rises and a stabilisation of bond yields would be positive. Both are on the horizon. The outlook for equities should therefore brighten in the course of the year.
Author:
Paul Severin
Member of the ÖVFA Board
Head of Communications Erste Asset Management
31 March 2023
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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.