On 1 July, Austria took over the Presidency of the EU Council for the third time since joining the European Union (EU). The main task of the country holding the Presidency of the Council is to act as a mediator in the deliberations of the 28 EU governments. Presidency cycles through the member states, changing every six months; Bulgaria held the reins in the first half of 2018, and Austria will hand them over to Romania at the beginning of 2019.
The EU is Austria's primary trade partner. According to a recent study by the Austrian Economic Chambers (WKO), other EU member states account for around 70 per cent of Austria’s foreign trade. Within the EU, Germany is the country’s chief trade partner by a wide margin. Both imports to Austria and exports from Austria account for around one third of trade with its largest neighbour. In terms of imports, Italy ranks second with 6.1 per cent, while, a non-EU country, namely the USA, is the second most important export trade partner, with Italy in third place.
The Eastern European EU countries are also an important factor of Austria’s foreign trade. The Czech Republic, Hungary, Poland and Slovakia are among the county’s chief trading partners for both imports and exports. According to the WKO, Austria has a long-standing history of extensive trade in the CEE region, which was an important market for domestic exports even before the eastern states joined the EU in 2004. With the exception of the Czech Republic, Austria has a trade surplus with all the countries mentioned, i.e. more is exported to the respective country than imported from it.
Austrian GDP growth clearly above the EU average in 2017
According to the WKO study, the dynamic foreign trade also contributes significantly to domestic economic growth. Compared to other European countries, Austria is on solid ground here. In 2017, the country recorded growth of 3.0 per cent, well above both the EU-28 average of 2.5 per cent and the eurozone average of 2.4 per cent. Also GDP per capita (adjusted for purchasing power) in Austria is with 128 percent well above the EU-28 average (represented at 100 percent).
Austria’s economy is expected to grow at a brisk pace in 2018. The Austrian Institute of Economic Research (Wifo) is expecting 3.2 per cent growth the current year, but the momentum is likely to slow somewhat in 2019 with an increase in gross domestic product (GDP) of 2.2 per cent. By comparison, the European Central Bank (ECB) is forecasting GDP growth of 2.1 per cent for the eurozone in 2018, slightly less optimistic than the spring figures. The central bank cites the growing global trade conflicts as a potential obstacle.
The trade dispute with the USA is only one of the major issues Austria will have to deal with during its Presidency. Customs duties on steel and aluminium came into effect on 1 June, and US President Donald Trump has repeatedly threatened the international community with punitive tariffs for the automotive industry. Other major points will be the ongoing Brexit negotiations with the UK, the negotiations on the Multiannual Financial Framework (MFF) and migration. The Austrian government has chosen “A Europe that protects” as the motto for its Council Presidency.
Forecasts are not a reliable indicator for future developments.
At its meeting in Vienna last weekend, the Organization of the Petroleum Exporting Countries (OPEC) and ten other cooperating countries – the so-called “OPEC+” – decided to increase oil production again. In the second half of 2018, the organization agreed to produce one million additional barrels (159 litres each) per day. This means that while the daily production limit of 32.5 million barrels, in effect since 2017, is to be maintained, unlike in the last few months it will now also be fully utilised. Due to the production shortfalls in Venezuela, OPEC has fallen well below its self-imposed limit in recent months.
OPEC has not announced which countries will produce more oil. However, market experts assume that not all countries will be able to ramp up production so quickly. They expect that Saudi Arabia, the United Arab Emirates, Kuwait and non-OPEC Russia in particular will be able to produce more in the short term.
Current FIFA World Cup host Russia is the world’s chief oil and gas producer and possesses an estimated 20 to 30 per cent of the world’s raw material reserves. The oil sector is also the key driver for the economy of the country itself: according to Erste Group calculations, the country’s economic growth is closely correlated with the development of the Brent oil price.
Oil prices rise after OPEC decision
Oil prices rallied immediately after the OPEC decision. Last Friday evening, the price for the North Sea grade Brent rose by more than two dollars to around 75.50 USD, and the price for the US variety West Texas Intermediate (WTI) rose by around three and a half dollars to over 69.0 USD.
Traders justified the price gains by the fact that the market had actually expected an increase in the production limit and therefore, accordingly, reacted with relief: before the meeting, Russian oil minister Alexander Novak had repeatedly mentioned a production increase of 1.5 million barrels per day. In addition, concerns that the OPEC+ countries would fail to reach an agreement proved unsubstantiated.
Oil prices continued to rise during the week. Brent grade oil saw a dip, as a large part of the additional oil produced by OPEC+ is likely to flow to Europe and Asia, but managed to recover fairly quickly. Thursday noon, Brent stood at 77.75 USD. WTI also rose sharply and climbed well over 70 USD by Thursday to 72.70 USD at the time of writing. However, the increase during the current week was less a result of the OPEC decision than of current US oil inventory data and political factors, as the US previously demanded that other countries stop importing oil from Iran.
Elections are scheduled for the next weekend of 24 June in Turkey, where, in an early ballot, the parliament and the president of the country are elected simultaneously for the first time. According to surveys, the state of the country’s economy is one of the most important issues for voters. In recent weeks, Turkey has presented a rather mixed picture.
Recent economic growth rate figures have been promising, with an increase by 7.4 per cent in Q1 of 2018 compared with the same period of the previous year. In addition, unemployment fell to 10.1 per cent between February and April, marking the lowest level in two years.
Weak lira and high inflation put the central bank under pressure
The weak lira, on the other hand, is difficult for the country. The Turkish currency has been falling against both the Euro and the US dollar for some time, losing around 20 per cent of its value against the Euro and nearly 25 per cent against the US dollar since the beginning of the year. The most marked drop occurred in May, after President Recep Tayyip Erdogan announced in a TV interview that he would assume greater control over the Turkish central bank if he won the elections. On 23 May the dollar rose by 5.4 per cent against the Turkish lira to a record high of 4.9290 lira, the euro increased to almost 5.77 lira on the same day*.
The sharp decline of the lira forced the Turkish monetary authorities to hold a emergency meeting, after which key interest rates were raised significantly from 13.5 to 16.5 per cent. However, this proved a short-lived remedy against the downward trend. Consequently, the central bank raised the key interest rate by a further 1.25 points to 17.75 per cent at its regular meeting on 7 June, preventing a further slide of the Lira for the time being. On Thursday afternoon, the US dollar stood at around 4.75 lira and the euro at around 5.5 lira.
The weak lira is a problem for Turkey insofar as it significantly increases the prices of imported goods and thus fuels inflation. According to the Turkish statistics office, the inflation rate rose by 12.15 per cent in May to its highest level since November. By comparison, inflation was significantly lower at 10.85 per cent in April. In addition, the country's national deficit has increased perceptibly, increasing by 78 per cent to the equivalent of EUR 3.7bn in the first five months of the year. This imbalance in currency and inflation also shows in Turkey's consumer trust. In May, for example, the corresponding barometer of the Turkish Statistical Institute TurkStat fell by 2.8 percentage points compared to April.
Forecasts are not a reliable indicator for future developments.
All data as of 21/06/2018
The central bank policies of the USA and Europe are diverging further. While the US Federal Reserve (Fed) continued to raise interest rates this week, the European Central Bank (ECB) is still waiting, leaving its key interest rate at 0.00 per cent, which will likely not change until at least mid-2019. However, the ECB has already taken a first step towards abandoning its ultra-loose policy and set a schedule for the end of the bond purchase programme.
According to the European central bank, the programme could expire at the end of 2018. In addition, the ECB wants to reduce the monthly volume of purchases starting October from EUR 30bn to 15bn while also keeping a close eye on inflation outlook in the course of these decisions. This gradual reduction of the ultra-loose monetary policy was initially well received by the European stock markets; however, the euro experienced a dip of more than two cents. On Friday afternoon it stood at around 1.16 USD.
Since the start of the programme in March 2015, the central bank has acquired securities with a total value of over EUR 2.4tn to boost inflation in the euro zone and restore the ECB's target of around two per cent. Inflation has recently approached this level again: In May, the annual inflation rate in the euro zone climbed to 1.9 percent. Higher energy prices were an important driver in particular.
Fed announces two potential further interest rate hikes in 2018
Meanwhile, the monetary policy’s normalisation is already in full swing in the US. As expected, the Fed raised its key rate band by a further 0.25 points to currently 1.75 to 2.00 per cent on Wednesday evening. While this step was expected in the market, the interest rate forecast was noted with particular attention. The Fed has announced two possible further interest rate hikes instead of the previously promised single one. The forecast for 2019 remains unchanged, however, with three rate hikes.
There is currently no reason for the Fed to be shy about tightening the rates, as the US economy is running smoothly. “The decision you see today is another sign that the US economy is in great shape," Fed Chairman Jerome Powell commented on Wednesday evening’s interest rate hike. Unemployment in the US is currently at its lowest level in 18 years. In addition, inflation continues to rise. In May, US annual inflation reached 2.8 percent, a six-year high.
However, this means that inflation is already well above the Fed target of around two percent. With the higher interest rates, the central bank must therefore also counteract the possible threat of overheating. A higher key interest rate raises the costs for banks when borrowing money from each other. As a result, the cost of loans for businesses and consumers will also increase. This will enable the central bank to counteract a too-rapid economic boom.
Forecasts are no reliable indicator for future developments.
Since 1 June, the grace period for the EU is over, and tariffs on steel and aluminium are in effect for the European community and the USA’s neighbouring countries of Mexico and Canada. As of now, a fee of 25 per cent will have to be paid for importing steel, and 10 per cent for importing aluminium, into the USA. The penalties were actually imposed as early as March, but the Union and the two US neighbours were initially exempted from this rule. This further exacerbates the global trade conflict.
Politically, emotions were running high after the US customs decision. The EU announced tough countermeasures, and Mexico and Canada have already published lists of retaliatory tariffs on US goods. All three political entities have also filed complaints against the US with the World Trade Organisation (WTO). However, the new trade restrictions are also controversial in the USA itself: Larry Kudlow, economic advisor to US President Donald Trump, admitted that the tariffs could even harm the country’s economy.
Meanwhile, the financial markets have reacted calmly so far, not least because the topic was already an issue in March and April and has therefore already had its effect on the market. In April, for example, aluminum futures went on a rollercoaster ride from their previous annual low of 1,993* USD per tonne to an annual high of 2,550 USD, an increase of more than 28 per cent. Within the same month, however, the price returned to around 2,250 USD. Currently, aluminium stands at around 2,330 dollars on the London Metal Exchange, the price having only risen by around 1.4 per cent since the beginning of June.
Futures on hot rolled steel have recovered somewhat on the New York commodity exchange since the beginning of the month; there have been no significant price fluctuations in recent months. Since the beginning of the year, however, steel prices have risen by more than 37 per cent. Aluminium, on the other hand, has been stagnating with an increase of around 3 percent since the beginning of 2018.
Steel stocks in Europe only under short-term pressure
The stock markets have so far been spared major turbulence. After US Secretary of Commerce Wilbur Ross announced the end of the grace period, European steel stocks came under short-term pressure, including the two major German steel companies ThyssenKrupp and Salzgitter. Just one day later, however, the situation calmed down again and share prices recovered, making the overall impact on the securities relatively small. US steel producers’ exchange rates hardly benefited from import taxes for foreign competitors.
Experts’ assessments of the economic impact of the tariffs also gave cause for relief. “In my opinion, the immediate impact of the current decisions is limited. We are talking about 0.04 per cent of the European Union’s GDP,” said Jens Weidmann, head of the German Bundesbank. However, tariffs for the automotive industry, if introduced by the US, could cause more turmoil in the markets. The US government is currently examining a potential imposition of import duties on cars.
* All data as of June 7, 2018
Forecasts are no reliable indicator for future developments.
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