Sluggish economy
Growth expectations in Europe, particularly in Austria, have recently been revised downwards. The Austrian Institute of Economic Research (Wifo) and the Institute for Advanced Studies (IHS) are forecasting real GDP growth of just 0.2% and 0.5%, respectively, for this year and 1.8% and 1.5%, respectively, for 2025.
Productivity and economic growth have been stagnant for numerous quarters. The high interest rates in particular are weighing on construction activity and demand for capital goods. Even the manufacturing sector is showing a decline.
In a global comparison, the USA delivered surprisingly strong growth of 2.3% in the first quarter of 2024, while China has announced an ambitious growth target of 5% for 2024. Overall, however, economic growth in the developed economies remains below potential.
Austrian inflation one percentage point above Eurozone
Despite the fact that inflation rates are falling on a global scale, they remain above the central banks' targets, especially in the developed economies.
According to the OECD, inflation is expected to hit 5.7% this year, compared to 2.9% for the G7 countries. However, there is a great deal of uncertainty with regard to the momentum of the inflation trend, as certain sectors may not be able to dampen the high inflation rates as quickly as hoped due to a tight labour market. This increases the risk of second-round effects, and it could lead to higher inflation expectations in the long run.
Although inflation rates in Austria are on the decline, they remain well above the Eurozone average and the ECB's target rate of 2%. Wifo forecasts an inflation rate of 3.8% in Austria for 2024, while the IHS expects 3.5%; 2025 forecasts are 2.7% (Wifo) and 2.6% (IHS), respectively. Overall, inflation should therefore remain about one percentage point above the Eurozone average and impact the competitiveness of export-oriented companies.
Eurozone key-lending rates expected at 3% by year-end
Analysts expect the European Central Bank to cut its key-lending rates from 4% to 3% by the end of the year due to the weakening economy and falling inflation, with rate cuts envisaged to begin in June. Due to the weak economic environment in Europe, the ECB is expected to cut interest rates more than the Fed. In the USA, market participants currently expect the Fed to cut its rates from 5.5% to 4.0% (upper band), with the first rate cut also envisaged for June.
Geopolitical risks remain high
The ongoing conflicts in Ukraine and the Middle East come with both regional and global repercussions. They have a negative impact on the world order and could lead to the emergence of new crisis spots. We can currently see no end to the conflicts, which means that the strain on the already fragile global structure remains in place.
Vienna stock exchange slightly positive in the year to date
In Q1 2024, the Vienna stock exchange posted slight gains in the ATX index. However, the market lagged behind other indices such as the German stock index (DAX) or the Euro Stoxx 50 index, as these indices recorded double-digit profits. Financial shares in particular (banks and insurance companies) have so far outperformed the market as a whole. The industrial sector, on the other hand, has seen some significant losses.
Equity environment remains interesting on the back of possible interest rate cuts
Overall, the environment for risky asset classes remains interesting due to possible interest rate cuts. This would confirm the assumption that the monetary authorities also expect a more relaxed situation in the inflation arena while at the same time improving the investment climate for private individuals and companies. This in turn could lead to improved economic activity in the coming year.
Author:
Paul Severin
ÖVFA member of the Board
Austrian Association for Financial Analysis and Asset Management
3 April 2024
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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.