UniCredit Bank Austria Business Indicator:
Economic slowdown reduces growth prospects for 2020 to around 1 percent

  • In October, the UniCredit Bank Austria Business Indicator reached 1.5 points once more, signalling a continuation of the moderate pace of growth in late autumn 2019 
  • Although the export environment has stabilised, the pace of growth in the final quarter is likely to slow to a year-on-year figure of 1 percent as the boost from domestic demand drops off 
  • Following the slowdown observed over the course of 2019, annual economic growth is expected to be only 1.5 percent, down on last year's 2.4 percent 
  • The lack of momentum in global trade and a cooling domestic economy suggest that 2020 will bring lower GDP growth of around 1 percent 
  • Low growth will have a knock-on effect on the labour market, with the rate of unemployment rising to 7.5 percent in 2020 after a drop to 7.4 percent in 2019
  • Low oil prices and weak price pressure from demand are curbing inflation in Austria, with the figure set to remain below 1.5 percent during the next few months 
  • Annual average inflation will reach a maximum of 1.6 percent in 2019, and is expected to increase only slightly in 2020, to 1.8 percent 

The start of the final quarter of 2019 saw no change in the economic sentiment in Austria compared with previous months. "The UniCredit Bank Austria Business Indicator reached 1.5 points again in October. This figure has not changed since June, which is a sign that economic development has remained stable since the beginning of the summer. Yet the pace of growth is significantly lower than in 2017 and 2018", reports Stefan Bruckbauer, UniCredit Bank Austria Chief Economist. Bruckbauer also notes that: "The economic picture in Austria benefits from strong domestic demand, with a high rate of growth in the consumption-heavy services sector and the construction industry, but suffers from sluggish global trade that has now pushed the export-focused manufacturing sector into a recession."

Global economic confidence remains low, but a further decline is unlikely 
The latest Business Indicator for October indicates that the worsening of the international export picture has halted as far as Austria is concerned. Observers are optimistic that the trade talks between the United States and China will reach a successful conclusion and that a favourable decision will be taken on US car import tariffs, putting an end to the decline in global industrial confidence. Nevertheless, leaders of Austrian industry are significantly more pessimistic than they were a month ago. After three years of a much more optimistic outlook than the rest of the world, the climate among domestic industrial players is now similar to the global average once more. 

Despite an unfavourable international environment, the construction industry continues to exhibit particularly dynamic growth thanks to a healthy level of activity, and the services sector continues to drive growth in the Austrian economy owing to the above-average consumer sentiments. "The decline in export trade appears to have levelled off for now, and an increasing number of indicators suggest that global trade has at least stabilised and the pace of growth is moderate, but the domestic economy is losing momentum. Economic sentiment in the construction industry and the services sector worsened in October, and consumer confidence is also showing a downwards trend in the medium term, despite the slight increase observed recently", says Bruckbauer. 

Economic slowdown as 2019 comes to an end
Over the next few months, domestic demand is expected to provide less of a boost to economic growth in Austria than it has in the past. The challenging export environment is unlikely to bring the growth rate down even further, but the economists at UniCredit Bank Austria expect overall economic growth to continue slowing down between now and the end of 2019, dropping to a year-on-year figure of 1 percent. This will make the fourth quarter of 2019 the slowest period of growth recorded by the Austrian economy for over four years. "The economic slowdown we've been seeing since the start of 2018 will continue between now and the end of 2019. Average growth for 2019 as a whole is likely to be around 1.5 percent, which is significantly lower than the figure of 2.4 percent recorded for last year", believes Bruckbauer. 

Stabilisation of growth at around 1 percent in 2020
The difference between the rate of growth in foreign and domestic demand is expected to diminish in 2020. Yet the main reason for this approximation of growth rates is likely to be a reduction in the boost to growth provided by domestic demand. Global trade is predicted to experience an overall pick-up compared with extremely low growth rates posted for the first half of 2019, but the slowdown in the US economy predicted for 2020 means that the situation is unlikely to gain any more momentum than it has at present. 

Domestic demand will suffer primarily as a result of a drop in investment rates, even though financing terms continue to be favourable. Investments in construction will slow down, as will investments in capital equipment due to the decline in capacity utilisation. Consumption will continue to be the main driver of economic growth in Austria in 2020, but is expected to provide a lesser boost in view of deteriorating conditions on the labour market and lower wage increases. Fiscal stimuli, such as a reduction in health insurance contributions for low-income earners and an increase in pensions, cannot fully compensate for this. 

"After the noticeable economic slowdown that took place during 2019, economic growth in Austria will stabilise in 2020 at a lower level, even though domestic demand will provide somewhat less of a boost and despite the risk of a US recession. We are currently only expecting a GDP increase of around 1 percent. That will be the lowest growth rate for the Austrian economy since 2015", says UniCredit Bank Austria Economist Walter Pudschedl. 

Worsening conditions on the labour market and low inflation 
Economic growth in 2020 is likely to be too weak to keep the situation on the labour market stable. The rate of growth in employment (a year-on-year figure of less than 1 percent) will not be sufficient to compensate for the sharper increase in labour supply. "Following a drop in the rate of unemployment to an average of 7.4 percent in 2019, we expect the rate to rise to 7.5 percent in 2020. This will mark the first increase in the rate of unemployment since 2015", explains Pudschedl. 

Weaker economic growth also means that inflationary forces are unlikely to be unleashed. The dampening effect of low oil prices means that inflation is unlikely to increase year on year by more than 1.5 percent in the final quarter of 2019. Despite higher inflation values at the start of 2019, the annual average is therefore unlikely to exceed 1.6 percent. As oil prices are predicted to remain low and upwards price pressure from demand is predicted to be weak, all against the backdrop of a sluggish economic environment, inflation in Austria will also remain well below the ECB's year-on-year target of 2 percent in 2020.


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