UniCredit Bank Austria Business Indicator:
Global economic slowdown puts the brakes on growth in Austria

  • The UniCredit Bank Austria Business Indicator continues its decline after a brief respite in June with a decline to 1.6 points 
  • Increasing export challenges are putting a stronger strain on the domestic economy
  • Economic growth was weaker in the 2nd quarter of 2019 than at the beginning of the year, with an anticipated increase of 0.3 percent
  • The expected GDP increase for Austria remains unchanged at 1.4 percent for 2019 and 1.3 percent for 2020 
  • The rate of inflation remains low in the 2nd half of the year: On average, inflation will fall to 1.7 percent for the year in 2019
  • The low inflation outlook and increasing economic concerns suggest that the European Central Bank will ease monetary policy 

After a short respite in the previous month, the slowdown within the Austrian economy in mid 2019 even continued at an accelerated rate. "The UniCredit Bank Austria Business Indicator fell to 1.6 points in June, the lowest level since March 2016 and below the long-term average," explained UniCredit Bank Austria chief economist Stefan Bruckbauer, adding: "After the current decline, the so-called economic traffic light for Austria is no longer completely green for the first time in three years. Political uncertainties and smouldering trade conflicts increased the challenges for exports in mid 2019. Increased economic concerns around the world are increasingly weighing down on the mood in the domestic economy." 

Consumer optimism decreases 
The current decline in the UniCredit Bank Austria Business Indicator is primarily due to a renewed deterioration of the global economic environment around the middle of this year. In June, the export sentiment indicator, calculated on the basis of Austrian foreign trade shares, fell to its lowest level since autumn 2012. While the somewhat improved prospect of an agreement and the resulting slight easing in the US-China trade dispute was positive, global economic concerns have been compounded by rising political uncertainties in the Middle East. In addition, the imposition of additional US import duties on cars from the European Union is not yet off the table. 

The export-oriented domestic industry has come under pressure as a result of these conditions, and new business is declining. The positivity that was at a high during the last two years within Austrian industry is over, and the long-term average has now fallen short. "The longer the domestic industry suffers from global uncertainty, the greater the risk that the weakness will spread to other sectors of the economy. But the construction and services sectors are still resilient, supported by the buoyant mood of consumers," says UniCredit Bank Austria economist Walter Pudschedl. The mood is still positive in construction due to full order books, but the high point has now clearly been passed. Austrian consumers are also very optimistic in mid 2019. But the latest survey results reveal a future clouding of sentiment as, among other things, worries about job security increase again. 

Economic growth lost some momentum compared to the beginning of the year 
The real economic data available until now and the decline in the UniCredit Bank Austria economic indicator to an average of 1.9 points from April to June suggest a slight slowdown in growth momentum for the second quarter compared with the beginning of the year. "After a 0.4% increase in GDP over the previous quarter for the first three months of the year, we anticipate a slightly reduced momentum of 0.3% for the second quarter. Compared with the previous year, GDP growth of 1.4 percent will be about the same as at the beginning of the year. Economic growth however halved during the first half of 2019 when compared to 2018," says Pudschedl. 

Growth stabilizes at the level of the first half of 2019
The slower pace of the global economy will continue to be responsible for the more moderate growth prospects of the Austrian economy in the second half of 2019 and in 2020 when compared to 2018. Momentum in exports will remain modest in the second half of 2019, despite initial signs of stabilization in global trade. Lower growth in some key trading partner countries will significantly reduce the growth contribution of foreign trade, which was around one third in 2018. Contributing to this is the only slightly reduced import demand, which is supported by solid domestic demand. 

"The Austrian economy cannot keep pace with the particularly strong momentum of recent years due to the weaker global economy. However, domestic demand, driven by private consumption, will provide sustained growth of 1.4 percent in 2019 and 1.3 percent in 2020. As a result, the Austrian economy will continue to gain slightly better momentum than the eurozone, for which we expect GDP to increase by 
1 percent each," says Pudschedl. Private consumption is expected to be the mainstay of the domestic economy in the coming years, fuelled by higher wage dynamics, high employment growth, and fiscal stimulus, such as the Family Bonus Plus scheme or the reduction in social security contributions for low paid workers. On the other hand, due to the high level of uncertainty, a weakening of investments, especially for equipment, can be expected. Due to the demographically determined continuing increase in housing demand, construction investment will hardly lose any momentum for the time being. 

Inflation will fall to an average of 1.7 percent in 2019 
After averaging 2 percent in 2018, the lower price dynamic of oil has dampened inflation since the beginning of the year. In the first half of 2019, the average inflation in Austria amounted to only 
1.7 percent. The positive momentum derived from the price of oil is expected to continue to abate in the coming months. At the same time, as a result of high employment growth and higher wage growth, upward, demand-side pressure on prices will tend to increase somewhat over the coming months. These two factors will largely offset each other meaning that inflation will remain modest in the second half of 2019. 

"After the slowdown in inflation in the first half of the year, we still expect only moderate inflation in the coming months due to the slower rise in energy prices. With an annual average of 2019, inflation will be 
1.7 percent below the previous year’s level," says Bruckbauer. This means that inflation in Austria will be higher than in the eurozone for the eleventh year in a row, for which a value of 1.4 percent on average is to be expected. However, it is just below the European Central Bank’s inflation target of just under two percent.

New rounds of monetary easing in the US and the euro area
Low inflation expectations and increased economic uncertainties in recent weeks have changed the monetary outlook for the second half of 2019 and 2020. In the US, the start of a monetary easing cycle is imminent. In the second half of 2019, the Fed funds target rate could be lowered in three steps from 25 basis points to 1.75 percent. For 2020, further rate hikes by the Federal Reserve totalling 50 basis points are likely. 

The economic worries and the risk that US easing might help to empower the euro against the US dollar have given the ECB a dovish tone, which is expected to ease monetary policy in the euro area as well. "We see little room for manoeuvring in terms of interest rate policy for the ECB and therefore continue to expect no change in the repo rate until the end of 2020. However, we expect a reduction in the deposit rate of the ECB, an improvement in the terms of the announced TLTROs, and a resurgence of the asset purchase program," said Bruckbauer, specifying: "We expect the ECB to lower the deposit rate by 
10 basis points to minus 0.5 percent in the coming months. In order to promote utilization, the conditions of the targeted longer-term refinancing operations announced for September could be improved. In addition, if economic growth in the euro area remains below potential, it is likely that net purchases will resume as early as 2020, as part of the asset purchase program." To increase room for manoeuvring, this would probably require an increase of the maximum permissible ECB share in the debt of a state of currently 33 percent. 


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