UniCredit Bank Austria Business Indicator:
Economic growth of 1.5 percent expected for 2019; new forecast for 2020 lowered to 1.1 percent; inflation below ECB target at 1.6 percent and 1.8 percent respectively

  • In September, the UniCredit Bank Austria Business Indicator reached 1.5 points once more, signalling a continuation of the moderate pace of growth in the autumn 
  • Sustained high levels of consumption drove estimate economic growth of 1.5 percent in Q3 2019. 
  • GDP also looks set to increase by 1.5 percent for 2019 as a whole
  •  Domestic demand suppressed by the weakness of the global economy: UniCredit Bank Austria downgrades GDP forecast for 2020 from 1.3 percent to 1.1 percent 
  • After dropping to 7.4 percent in 2019, the unemployment rate is expected to increase to 7.5 percent in 2020 
  • Low oil prices and a weaker economy are likely to see inflation drop to an average of 1.6 percent for 2019. With a forecast of 1.8 percent, inflation is also expected to fall short of the ECB target in 2020.
  • Favourable interest rates create fiscal leeway 

Since summer 2019, the Austrian economy has enjoyed some respite from the slowdown that has characterised the situation since the high experienced at the turn of the year in 2017/18. "September saw the UniCredit Bank Austria Business Indicator remain at 1.5 points for the fourth consecutive month. Following a slowdown in economic growth to 1.7 percent in the first half of the year, the indicator now paints a picture of sustained economic momentum for the third quarter. Year on year, the Austrian economy has continued its trend of moderate growth this autumn, at around 1.5 percent", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. 

In contrast, escalating challenges on the global stage bring with them an increased risk of another economic slowdown in the coming months. There was a noticeable downturn in the export performance of the Austrian economy in September. "The mood in the European industrial sector has clouded significantly owing to increasing concerns regarding the impact of protectionism in global trade. As a result, the economic projections of domestic industrial companies deteriorated in September. Although the domestic economy is still strong, we are seeing the effects of negative external influences — in the muted consumer optimism, to name but one example", says Bruckbauer. 

Confidence among domestic consumers is waning despite good wage growth, driven by increasing concerns regarding job security. While the export-heavy industrial sector is really feeling the weight of the global slowdown and the boom in the construction industry is gradually running out of steam, the mood in the service sector looked somewhat more positive in September following the previous month's slump — but estimates across all sectors of the economy are nonetheless considerably less favourable than they were a year ago. 

GDP forecast for 2020 reduced to 1.1 percent
Domestic demand is set to remain the driving force behind economic growth in Austria in the coming months, but is likely to lose a little momentum against the backdrop of the weakening global environment. "Owing to the strong start to the year, we are still expecting economic growth of 1.5 percent for 2019. We have lowered our GDP forecast for 2020 to 1.1 percent in view of the sustained weakness of the global economy, which is expected to have an even greater negative impact on consumption and investment activity in Austria over the coming year", says UniCredit Bank Austria Economist Walter Pudschedl. 

Furthermore, the international environment is likely to feel the effects of a slowdown in the US economy in 2020, which will bring with it the risk of a mild recession. This would put even greater pressure on the Austrian economy, alongside the stifling effect of a protectionist trade policy (which could be exacerbated by US tariffs on European cars) and the potential for a disorderly Brexit. The result would be a slowdown in investment growth despite the sustained favourable financing environment, leading to a significantly greater decline in investment in machinery and construction. Private consumption is set to remain strong in 2020, but is nonetheless expected to be significantly less buoyant. The expected decline in the savings ratio will not be able to fully offset the lower wage growth and the effects of the worsening job market situation over the coming year. 

Reversing trend in the job market
Following a decline in the average unemployment rate to an expected figure of 7.4 percent for 2019, the waning economy is set to have a negative impact on the Austrian job market in 2020. Year-on-year employment growth has been falling since the spring; the number of vacancies is down and the decline in the number of job seekers is decelerating. "We expect to see a trend reversal in the domestic job market over the coming months. Unemployment is set to increase for the first time in five years. We anticipate an increase in the rate of unemployment to an average of 7.5 percent for 2020", says Pudschedl. The worsening situation is being driven primarily by unfavourable trends in the industrial sector. 

Inflation is low but well above the Eurozone average 
Considered year on year, inflation in Austria fell to an average of 1.6 percent in the first nine months of 2019. The economic slowdown and moderate oil prices will continue to temper inflation. "For 2019 overall, we expect average inflation to fall to 1.6 percent, following last year's 2.0 percent. Oil prices are set to continue inhibiting inflation in 2020, with the projected average of 1.8 percent falling short of the ECB target of 2 percent", says Pudschedl. Prices in the service sector will be somewhat more buoyant as a result of robust growth in private consumption, and this will see inflation in Austria remain above the Eurozone reference value of 1.2 percent.

Fiscal policy leeway
In the battle against low inflation, the ECB has long since exhausted its leeway in terms of monetary policy. In light of the further decline in economic growth, it seems increasingly appropriate to implement fiscal policy measures in the Eurozone to supplement the loose monetary policy — and many countries within the Eurozone, including Austria, do have the budgetary scope for such a strategy. Around half of the 19 Eurozone countries are expected to experience a budget surplus for 2019, and financing conditions are currently very favourable in the Eurozone countries owing to low interest rates. "In view of the prevailing economic trends, a more expansive fiscal stance in the Eurozone is set to be high on the economic policy agenda. The combination of rising GDP and increasing budget revenue alongside decreasing interest expenses create fiscal leeway without increasing debt", says Bruckbauer, adding: "Even with a budget deficit of 2 percent of GDP, Austria's public debt ratio would decrease in 2020." 


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