UniCredit Bank Austria Business Indicator:
Strong domestic trends keep Austria’s economic growth on track despite mounting export challenges

  • The UniCredit Bank Austria Business Indicator reached 1.6 points again in July: a calm and stable growth rate for the Austrian economy in summer 2019 
  • The gap is widening further between strong domestic demand and the weakness of the global economy 
  • Trade conflicts and political uncertainties are further dampening the outlook for the Austrian economy in the second half of 2019 
  • The expected GDP increase for Austria remains unchanged at 1.4 percent for 2019 and 1.3 percent for 2020 
  • The unemployment rate for 2019/20 is expected to stabilise at 7.4 percent
  • Oil prices are having a curbing effect: the average annual inflation for 2019 will fall to a maximum of 1.7 percent

After a marked slowdown in the first half of 2019, the economic situation in Austria remains subdued entering into the second half of the year. "The UniCredit Bank Austria Business Indicator remained the same in July as the previous month. At 1.6 points, the Indicator has stabilised at a level which signalises at least a moderate growth rate for the Austrian economy in the coming months. However, following the strong upturn since mid-2016, during which growth rates have sometimes hit the 3 percent mark, the current economic cycle seems to be coming to an end," says Stefan Bruckbauer, Chief Economist UniCredit Bank Austria. 

The pace of the economic slowdown in Austria is still determined from abroad. "At the beginning of the second half of 2019, the gap between the continuing success of the Austrian economy and the weakening global economy widened further," says Bruckbauer, adding: "Political uncertainty surrounding Brexit is increasing. The trade dispute between the US and China and increasing volatility in the financial markets could affect global trade even more in the coming months and increase the strain on the Austrian export economy."

Continued optimism within Austria despite increasing external challenges 
The current UniCredit Bank Austria Business Indicator stabilised at the beginning of the second half of 2019; however, this trend is still marked by a noticeable deterioration in the global economic environment, which can barely be compensated for by the ongoing strength of domestic demand. In July, the export sentiment indicator, calculated on the basis of Austrian foreign trade shares, fell to its lowest level since autumn 2009, when the financial crisis was gradually beginning to subside. Along with the slowdown in China and other emerging markets, Austrian exporters are particularly encumbered by the sluggish economy in Germany. In contrast, close connections with Eastern European markets are proving once again to be an advantage. 

Due to the impression of the declining demand from abroad, the mood in the export-oriented domestic industry further declined in July and has now fallen below the long-standing average for the second consecutive month. Nevertheless, the Austrian industry remains much more confident in comparison to other nations, as the strong domestic economy limits a decline in orders. In the construction sector, the situation improved in July and continues to approach the record levels of autumn 2018. In the service sector, too, optimism has somewhat increased, with Austrian consumers enjoying an ongoing, above-average sentiment. 

Cautious outlook for the second half of the year
Meanwhile, there is increasing certainty that the economic growth slowdown to an average of 1.6 percent in the first half of 2019 was not a brief economic downturn. While recent data indicate that global trade gained momentum around the middle of the year, political uncertainties and protectionist tendencies have once again increased, hampering the outlook for global trade. Within this environment, Austrian export dynamics will continue to weaken in the second half of the year. As a result, foreign trade will barely contribute to Austrian economic growth in 2019, especially as import demand is expected to remain high in the coming months due to strong domestic demand. 

"Domestic demand will remain the driving force in the coming months, but economic growth in Austria will not pass the 1.5 percent mark in the second half of the year due to a lack of support from foreign trade. We expect the GDP to continue to rise by 1.4 percent for 2019 as a whole," says UniCredit Bank Austria Economist Walter Pudschedl. Due to the favourable employment situation, increased wage dynamics and fiscal stimuli, private consumption will play an important role in growth with an increase of 1.5 percent. By contrast, investment activity will lose even more momentum in the second half of the year. While the order situation in the construction industry should provide further support, the development of capital investments is increasingly encumbered by the declining export economy. 

Growth stabilisation in 2020 under difficult conditions 
Currently, few growth stimuli have been identified for 2020. On the contrary, global trade will continue to suffer from the effects of trade conflicts and political tensions. Furthermore, there will be a noticeable slowdown in the US economy and even the risk of a recession. In Europe, a no-deal Brexit could leave its mark, meaning foreign trade will barely be able to contribute to economic growth in Austria in the coming year. 

Growth in Austria will therefore depend even more on the sustainability of strong domestic demand in 2020. However, despite the unabated favourable financing conditions, investment activity is likely to lose momentum in the weaker economic environment, and private consumption is also expected be less lively with reduced support from the labour market. 

"Private consumption is likely to receive significant fiscal stimuli next year, which will facilitate economic growth of 1.3 percent despite the international pushback. This will also be reflected in a weaker investment dynamic," says Pudschedl. On the one hand, the planned reform measures from the ÖVP-FPÖ government, such as the reduction of health insurance contributions for low-income earners, are likely to be decided in the autumn session of the Austrian Parliament. On the other hand, Parliament adopted several measures before the summer recess, such as the valorisation of nursing allowances, an increase in minimum pension, the introduction of statutory paternity leave and the change to how benefit periods are credited for public servants, rendered necessary by a decision of the European Court of Justice. These changes will further support total consumption figures by up to 1.5 billion euros. 

No further improvement in the labour market for the time being 
The economic slowdown has now reached the Austrian labour market. According to seasonally adjusted data, the two-year improvement trend in the first few months of 2019 has reached a standstill. The unemployment rate has been relatively stable at 7.4 percent since the beginning of the year. In the coming months, employment dynamics will remain too weak to allow enable a decrease in unemployment, given the continued increase in labour supply. 

"After a rate of 7.7 percent in 2018, we expect an average unemployment rate of 7.4 percent for 2019 as a whole. As the economic environment is also predicted to be weaker, the unemployment rate is also not expected to improve in 2020," says Pudschedl. The slowdown in economic growth will continue, but should be sufficient to keep unemployment largely stable. In 2020, the unemployment rate will remain at an average of 7.4 percent, with the actual rate likely to shift upwards depending on how the increase in labour supply to Austria from other EU countries develops.

Inflation is still well below 2 percent
In the first seven months of 2019, inflation in Austria fell to an average of 1.7 percent. While high employment growth and stronger wage dynamics have caused a noticeable rise in inflation above service prices, food prices and energy prices in particular have subdued inflation. The US-China trade dispute is dampening global economic activity, most recently pushing oil prices to below 60 US dollars per barrel. The tense situation in the Middle East and the Civil War in Libya can currently only mitigate the drop in oil prices. "Inflation will be noticeably reduced by the lower oil price in the coming months. At the same time, the upwards pressure on prices on the demand side will somewhat increase. These two effects will largely compensate for each other. Inflation will continue to be very moderate in the second half of 2019, with the annual average expected to be 1.7 percent," Bruckbauer concludes. 


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