UniCredit Bank Austria Business Indicator:
Moderate growth amid global weakness and strong domestic demand

  • In August, the UniCredit Bank Austria Business Indicator reached 1.6 points once more, signalling a continuation of the moderate pace of growth associated with the first half of 2019 
  • Growth is beginning to settle, as global trade appears to have bottomed out and domestic demand is declining
  • Economic growth is expected to continue to decline to 1.4 percent in 2019
  • Trends have reversed in the job market: After the drop in the rate of unemployment to 7.4 percent in 2019, this is expected to increase again slightly to 7.5 percent in 2020 
  • Inflation remains below 2 percent year-on-year in 2019/20 
  • After the attack on Saudi production plants, the price of oil is only expected to fluctuate in the short-term. This should therefore only have a minor impact on inflation in Austria 

The slowdown in the Austrian economy came to a standstill over the summer. Growth stabilised at a more moderate pace. "The UniCredit Bank Austria Business Indicator has remained unchanged for three months at 1.6 points. The indicator for the Austrian economy therefore signals that this rate of growth, which is significantly lower compared with 2018, will continue into the autumn. After an increase in GDP of 1.6 percent in the first half of 2019, we expect economic growth to be around this level for the third quarter too," says Chief Economist at UniCredit Bank Austria, Stefan Bruckbauer. 

In addition, the Austrian economy is characterised by varying trends in domestic and foreign demand. "In August, for the first time in months, the gap between the positive domestic economy and the weakening global economy did not widen any further. Indeed, the convergence occurred because, despite existing political tensions, smouldering trade conflicts and the threat of a no-deal Brexit, the conditions for exporting improved slightly. At the same time, scant international support is now placing higher levels of strain on domestic demand," says Bruckbauer. 

More settled growth, but noticeably lower levels overall 
The current UniCredit Bank Austria Business Indicator did not change at the beginning of autumn compared to the previous two months. However, the individual components now signal somewhat more settled growth over the coming months. The export sentiment indicator calculated on the basis of Austria's share of foreign trade rose slightly in August for the first time in the current year. The EU internal market, including the core market of Germany, showed some improvement, while the challenges for domestic exporters, among others, increased in the Asian growth markets. 

Against the backdrop of the conditions for exporting improving slightly overall, the mood in domestic industry also improved somewhat in August, but still falls short of the long-term average. Austrian industry remains much more optimistic in comparison with other nations, as the strong domestic economy limits a drop in the number of orders. However, support has declined in the meantime. In August, optimism fell within both the construction and the services sectors. In the services sector, sentiment actually fell to a three-year low, despite the continued above-average confidence of Austrian consumers. 

Pace of growth only half that of the previous year 
Based on strong domestic demand, the Austrian economy will continue on its path of moderate growth over the coming months. However, a slowdown in investment activity is expected, particularly in response to the challenging export environment. While recent data indicates that global trade gained some momentum around the middle of the year, political uncertainties and protectionist tendencies continue to hamper outlooks for global trade and thus for the Austrian export economy too. "Following economic growth of 1.6 percent in the first half of the year, we anticipate a slightly lower increase in GDP for 2019 overall, at 1.4 percent. We expect support from domestic demand to decline towards the end of the year," says UniCredit Bank Austria Economist Walter Pudschedl.  

No recovery in 2020
The framework conditions for the Austrian economy are not expected to improve over the coming year. Global trade will continue to suffer from the effects of trade conflicts and political tensions. Additional pressures will arise as a result of the slowdown in the US economy and the possible consequences of a no-deal Brexit. Nevertheless, economists at UniCredit Bank Austria expect the rate of growth for the Austrian economy to rise above the 1 percent mark in 2020, driven by domestic demand. However, over the course of the year, not only investment activity but also private consumption will lose momentum due to a reversal of trends in the job market. 

Unemployment set to increase 
The slowdown in the economy experienced this year is already having a negative impact on the Austrian job market. The fall in the rate of unemployment since the peak of 9.2 percent at the beginning of 2016 has now come to a halt. Since the beginning of 2019, the seasonally adjusted rate of unemployment has stagnated at 7.4 percent. Over the coming months, the trend is expected to change and unemployment should increase at a moderate pace. "At 7.4 percent, the average rate of unemployment in 2019 will fall below the previous year's level of 7.7 percent. However, due to the weaker economy, unemployment is expected to start rising from winter at the latest. We anticipate a slight increase in the rate of unemployment to an average of 7.5 percent for 2020 overall," says Pudschedl. With a projected fall of less than one percent or an increase of around 35,000 people, employment in 2020 is predicted to lack the momentum needed to prevent unemployment from rising, as the labour supply is expected to increase. Since 2011, the workforce potential has increased by an average of more than 50,000 people per year. 

Inflation well below 2 percent
The slowdown in economic growth in the current year is accompanied by a drop in inflation. In the first eight months of 2019, average inflation in Austria fell to 1.6 percent year-on-year, with a low of just 1.4 percent in July this year. This is also due to the dampening effect of energy prices, as the price of crude oil, measured in euro, was around 4 percent below the previous year's figure in 2019. Strong consumer activity in Austria will keep inflation higher than in the Eurozone due to greater acceleration in service prices, which was only 1.3 percent in the first eight months. "For 2019 overall, we expect average inflation to fall to a maximum of 1.7 percent, following last year's 2.0 percent. In 2020, Austrian inflation will also fall below the 2 percent mark in line with the price of oil," says Bruckbauer. Following an average price of crude oil in 2019 of less than 65 US dollars a barrel, UniCredit Bank Austria's economists predict a fall to below 60 US dollars in 2020 due to the market being oversupplied. 

No long-term consequences expected as a result of the attack on Saudi oil production plants
The future trend in the price of oil is fraught with uncertainty due to recent political events. In our main scenario, we assume that the drone attack on Saudi oil production plants will only result in temporary price fluctuations and will stabilise at a level of around 60 US dollars within a short period of time. "A short-term spike in prices of crude oil to 100 US dollars a barrel would have little impact on inflation in Austria. Inflation would rise to over 2 percent year-on-year at year-end. On average in 2019, inflation would only be around a tenth of a percentage point higher than the currently expected 1.7 percent," says Bruckbauer. However, if distortions in price continue for a longer period, Austrian inflation would be expected to increase at a significantly higher rate— particularly in 2020—with correspondingly negative effects on growth.


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