Austria continues to experience economic upturn. “The UniCredit Bank Austria Business Indicator rose to 2.7 percent in March. These are the highest figures we have seen from the indicator since spring 2011”, says Stefan Bruckbauer, Chief Economist at UniCredit Bank Austria. Economic growth has stabilised at a high level during the first months of this year. “After a sharp GDP increase at the start of the year of around 2 percent in comparison to the previous year, the Austrian economy will now be able to continue its strong course of growth over the coming months. The first six months of 2017 are going to be very strong”, Bruckbauer adds.
A new wave of optimism in Austria
The UniCredit Bank Austria Business Indicator has increased in March as a result of improved economic confidence throughout all sectors of the Austrian economy. The assessment of Austria’s domestic industry, which has been more optimistic than the long-term average, has risen to even higher levels. The country’s order situation is good in terms of both foreign and domestic orders. Support from overseas stabilised at a high level in March. However, global industry confidence based on the Austrian value-added export share did not increase in March. As demand increases in the European economy, there is less tailwind coming from US industry in particular. In Austria, the mood has improved in both the construction and service industries during the month of March. Consumers continue to be optimistic. For the second time in a row, domestic consumer confidence is above the long-term average. While the positive effects of the tax reform continue to have an effect on the economy to a certain extent, long-term scepticism among Austrian consumers is beginning to disappear, mainly as a result of continued stability in the labour market.
The outlook for the domestic economy appears to be broadly optimistic. The economic upturn in Austria is becoming more robust. “At the beginning of spring, the service and construction sectors caught up with the sustained levels of high confidence in the industry as a whole. The foundation for economic upturn in Austria is becoming broader. All demand components contribute to economic growth, because a solid export environment compliments a strong domestic economy”, says Bruckbauer.
A strong first six months in 2017
The start of the year saw economic growth of around 2 percent in comparison to the previous year. This is the strongest increase the country has seen since mid 2011, driven mainly by sustained momentum from domestic demand. During the first months of the year, private consumption increased as a result of the after-effects of the 2016 tax reform and positive employment development. Given the persistently favourable financing conditions in an environment that is improving globally, increased capacity utilisation and the existing backlog of demand, the increase in investments over the first three months is expected to have continued. Following a weak second half of 2016, foreign trade is also likely to have contributed significantly to economic growth in the first quarter of 2017.
The most recent figures from the UniCredit Bank Austria Business Indicator suggest that this upward trend will continue its strong course into the second quarter of 2017. However, tailwind for the Austrian economy is set to decline over the coming months, although the decrease is not expected to be significant. Prospects remain positive for investments in construction and equipment, while private consumption is set to continue on a more positive course than previously expected, thanks to positive employment trends, and despite the positive effects of the tax reform having run their course. “As domestic demand begins to lose momentum over the coming months, demand from overseas will provide a stronger driving force for growth. Positive economic development in Europe and upwind in emerging economies bring promise of more support for the Austrian export industry. We are expecting an increase in economic growth to 1.8 percent for 2017 thanks to a strong first six months of the year”, says Bruckbauer. The pace of economic upturn will stabilise at a slightly lower level as of the second half of 2017, with more moderate momentum coming from domestic and overseas demand. In 2018 however, GDP growth is likely to continue at 1.5 percent, therefore above potential economic growth.
Trend reversal on the labour market: Austrians benefiting more
Consistently strong economic development has led to a trend reversal on the labour market. 2017 has seen an unemployment rate lower than that of the previous year for the first time since 2011. “We expect the rate of unemployment to fall to an annual average of 8.7 percent in 2017, following a drop to 9.1 percent in the previous year. Strong growth in employment of 1.5 percent, which has meant the creation of around 50,000 new jobs in Austria, has contributed to this change”, says Walter Pudschedl, Economist at UniCredit Bank Austria.
However, labour supply developments threaten to undermine this optimistic forecast. The influx of EU citizens into the Austrian labour market is expected to remain strong. However, the number of asylum seekers entering the labour market could be less than previously expected, due to the introduction of a mandatory integration year with training measures for up to 15,000 people, among other factors.
Affected by this development in labour supply, domestic and foreign workers will benefit to varying extents from this relaxation on the labour market caused by economic trends. Austrians have been the first to benefit from the improvement in the situation on the labour market. The unemployment rate among Austrians declined slightly to 8 percent in 2016, while the rate among foreigners remained at a significantly higher level of 13.5 percent. In the first quarter of 2017, the unemployment rate declined both for Austrians and foreigners. The reduction in the seasonally-adjusted rate for unemployment to 7.8 percent for Austrian workers is due to a drop of over 7,000 in the number of Austrians seeking work, and an increase in jobs of over 10,000 in comparison to the annual average for 2016. The number of foreigners seeking employment in Austria, however, continues to rise. The drop in unemployment rates is exclusively due to the sharp increase of almost 25,000 employees. “While the good state of the economy has led to an overall reduction in unemployment among Austrian workers, there is a serious case of displacement among foreign workers. Employment growth is not enough to absorb the influx of new workers from abroad and to reduce the high number of foreign job seekers in Austria”, says Pudschedl.
Inflation has exceeded peak levels for this year
The rapid increase in inflation rates since autumn of the previous year is coming to an end. Inflation is expected to have already reached its peak for 2017 during the first quarter at an average rate of 2.1 percent. This can be attributed to the significant decline in upward pressure on energy prices. The increase in oil prices is slowing down. The upward pressure from second-round effects including food transportation costs, fiscal measures such as the increase in tobacco tax implemented in April and strong economic upturn driven by demand are more than compensated for. “Despite inflation rates of over two percent during the first quarter, we are expecting an average inflation rate of 1.8 percent for 2017 overall. Fears of a continuous, rapid increase in inflation rates are unfounded, given that the predominantly external effects that have been responsible for the increase since autumn of last year are slowly coming to a halt”, says Pudschedl.
Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel: +43 (0) 50505 - 41957;