UniCredit Bank Austria Economic Indicator:
Austria does not escape the global economic downturn

  • The UniCredit Bank Austria Economic Indicator falls to 2.9 points in December, finishing out 2018 at its lowest value for the year, although it is still above the long-term average 
  • Headwinds caused by the global economic environment continue to gather pace and dampen business sentiment in the domestic industry
  • However, optimism remains for consumer-related sectors and has even increased in the construction sector 
  • The economy is expected to grow by 1.9 per cent in 2019, with the downturn in global trade being offset by positive impact of changes in exchange rates, oil prices and wages
  • Mild recession forecast for the US in 2020 not without consequences: with a projected growth rate of 1.5 per cent, the Austrian economy will not reach its potential growth in 2019 for the first time in four years
  • Falling inflation and economic slowdown is likely to leave the ECB little room to raise interest rates

After a strong start to the year, business sentiment declined steadily over the course of 2018 to reach its lowest point of the year in December. “The UniCredit Bank Austria Economic Indicator fell to 2.9 points at the end of 2018. Due to mounting international headwinds, business sentiment in Austria fell from its highest point exactly one year ago to its lowest level in 20 months," states Stefan Bruckbauer, Chief Economist at UniCredit Bank Austria. He added: "Compared to the start of 2018, the Austrian economy is growing at a slower pace, although since the start of 2019, this growth is still slightly above its potential growth rate." Despite this drop, the UniCredit Bank Austria Economic Indicator is clearly still ahead of the long-term average. 

Concerns about the global world economy dampen sentiment in Austria 
The deterioration in exports is having the biggest impact on business sentiment in Austria today. The last time global business sentiment in the industrial sector, which is so closely tied to Austrian exports, fell to such an extent within a single month was more than five years ago, when concerns about a sharp economic slowdown in China intensified and the European economy slid into a renewed recession. Global business sentiment has fallen to the level recorded at the close of 2016. This decrease can be partly attributed to the very uniform downward movement seen across the globe in both emerging markets and advanced economies, particularly in Austria's most important European trading partners, such as Germany, France and Italy. Combined with declining export orders over the past three months, the worsening global figures have significantly weighed on optimism within the domestic industry. 

"Concerns about the global economy have increased significantly and, amongst other things, have led to strong volatility on the stock markets in recent weeks. On the back of these concerns, sentiment in Austria’s export-oriented industry deteriorated rapidly towards the end of 2018. This increasing uncertainty is now also having a negative impact on other sectors of the economy and on consumer sentiment. Construction is the only sector in which business sentiment was still improving at the end of the year," added Bruckbauer. 

Due to high capacity utilisation and strong order figures, construction is currently the only sector that is still resisting the negative sentiment trend, which is slowly spilling over into the Austrian economy from abroad. However, based on a long-term comparison view, business sentiment in Austria remains above average. 

Soft or hard landing?
The economic slowdown is now clearly evident in Austria, as seen in the continuous drop in UniCredit Bank Austria's Economic Indicator in the past year, which has fallen by a total of 1.5 points since December 2017. Questions about whether or not we are experiencing an economic slowdown have now shifted to questions about the extent of the slowdown that is clearly happening. 

"We are confident, for 2019 at least, that strong domestic demand in the Austrian economy will compensate for the slowdown in global trade, which can be attributed to the effects of increasing political uncertainty and protectionist measures. Although the economy will grow by 1.9 per cent, and thus at a slower pace than in the past three years, growth will still be just above potential," explains Walter Pudschedl, Economist at UniCredit Bank Austria. 

Private consumption is projected to play a key role in offsetting unfavourable external influences on the Austrian economy, despite growth being expected to fall to approximately 1.5 per cent. In 2018, private consumption grew at its highest rate in more than a decade. Moderate fiscal stimuli resulting from the implementation of tax-relief measures for families with children ("Kinderbonus Plus"), a continuously improving job market and increases in wage growth are also expected to boost private consumption. 

Growth in gross capital investment is likely to slow down even further, to reach 2.5 per cent. This can be attributed to a very lengthy investment cycle coming to an end coupled with weaker demand from abroad, particularly given that financing conditions are beginning to change. Notwithstanding this, foreign trade will continue to grow in 2019, albeit at a slower pace, as falling demand for imports of capital goods will likely come close to compensating for the declining export numbers, particularly as the falling exchange rate against the dollar will help support the price competitiveness of exporters. Economists at UniCredit Bank Austria are forecasting that the average yearly exchange rate between the euro and the dollar will fall from 1.18 in 2018 to 1.11 in 2019. 

Mild, short recession in the US will slow down growth in 2020
While the Austrian economy is expected to largely grow at a robust albeit slower pace in 2019, the outlook for 2020 is considerably less positive. A strong slowdown in the US economy, which may even slide into a mild, short recession mid-year, will eventually pose yet further challenges for the Austrian export industry. 

"We project that economic growth in Austria will fall to just 1.5 per cent in 2020, due to the negative impact of a US recession on global trade. Exports and capital spending are expected to suffer most, as the impact of weaker foreign trade may exacerbate the situation due to a slightly stronger euro," Pudschedl explains. On the other hand, private consumption is likely to be more resilient to other demand components, since the disadvantages attributable to decreasing employment and a slightly higher propensity to save are expected to be offset by lower inflation. 

Low inflationary pressures place ECB under strain 
During the second half of 2018, inflation rose above the two-per cent threshold compared to 2017, driven by higher energy prices. However, toward the end of the year, inflation appeared to have reached its peak. The significant fall in oil prices since the middle of October, from more than USD 85 per barrel to a low of USD 53 per barrel, will contribute to a slight drop in inflation in Austria, despite the renewed slight upward trend evident in recent weeks. 

After an average increase of 2 per cent in 2018, inflation is projected to rise by 2 per cent again in 2019. The slight downward trend from the highest value of 2.2 per cent in November 2018 will accelerate further in 2020 due to the drop in demand. At a rate of 1.8 per cent, inflation will remain above the euro-area average for the twelfth year in a row. 

"Due to plummeting oil prices and the economic slowdown above all, which is expected to intensify in 2020, the window of opportunity for the ECB to normalise monetary policy, a process they have only just begun, could close again very quickly," explains Bruckbauer, adding: "Given the discontinuation of the ECB's security purchase programme at the end of 2018, the possibility of a rate hike at the beginning of 2020 is – at minimum – limited. The only options open to the ECB are to raise the deposit rate back to zero per cent and apply a one-off increase to its repo rate, bringing it to 0.25 per cent."


UniCredit Bank Austria Economics & Market Analysis Austria 
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at