Following an average increase in GDP of 2.9 percent in the first three quarters of this year, compared with the same periods last year, the Austrian economy is continuing to experience a strong economic tailwind. “At the start of the final quarter of 2017, the UniCredit Bank Austria Business Indicator rose once again to reach its current position at 4.4 points – its highest value for more than 10 years. We therefore expect the strong growth of the Austrian economy to continue even towards the end of the year. With a strong final quarter, the Austrian economy will have grown by up to 3 percent, the highest value since 2007”, says UniCredit Bank Austria Chief Economist, Stefan Bruckbauer.
Almost all components of the UniCredit Bank Austria Business Indicator have contributed to this current increase, thus highlighting the broad foundation underpinning Austria's current economic growth. “At the start of the final quarter, the mood in the Austrian economy has improved further overall. In particular, the industry and the service sectors have become more reliable. Consumer optimism has also increased further, and the positive mood in the construction industry has been consolidated”, says Bruckbauer.
Mood better than actual economic dynamism
October's increase in the UniCredit Bank Austria Business Indicator was brought about above all by the significant increase in consumer confidence. Following a long period of scepticism, an increasingly optimistic attitude has been observed among domestic consumers in 2017, keeping pace with improvements in the labor market. The mood in the service sector is also continuing to improve significantly.
While the situation in the construction industry remains stable with a still positive order situation, the mood in domestic industry is improving above all due to an increase in demand from abroad. Global industry confidence, measured based on Austrian foreign trade share, has reached its highest level since July 2007. Since then, however, the mood values included in the indicator have been above average overall and, for some months now, have not quite been in tune with subsequent actual incoming economic data. This suggests that the UniCredit Bank Austria Business Indicator presents a slight exaggeration of the current pace of growth of the Austrian economy.
Self-sustaining upturn in 2018
The current excellent mood is an indication that the Austrian economy will continue to grow vigorously in 2018. Thanks to the revitalization of global trade, which is a powerful stimulus for the domestic export economy, there has been a significant increase in investments. Consequently, consumption has been able to cope with the diminishing positive effects of the 2016 tax reform. Supported by domestic demand and solid global growth, the economic upturn in Austria is expected to stabilise in 2018 and return to normal.
“The by now self-sustaining upturn will bring about a 2.4% increase in GDP in Austria in 2018. There are two main reasons behind this normalization of the rate of growth compared with the particularly strong 3 percent growth rate from 2017: Firstly, the slightly negative impact of the Euro rate increase on the domestic export economy and, secondly, the slow-down in investment activity due to the already long period of very vigorous growth, as well as the shift in focus from replacement investments to expansion investments”, says UniCredit Bank Austria Economist, Walter Pudschedl.
Even if investment growth and consumption slow slightly, domestic demand remains the driving force behind the Austrian economy. In addition to the good mood among companies, in particular in the production of capital goods and construction, investment activity in 2018 will continue to be supported by a combination of increasing profitability and solid liquidity of the companies, as well as by the favorable finance conditions.
Private consumption may lack fresh fiscal stimuli in 2018, such as that of the last tax reform, but the boost in employment levels and a slowly strengthening wage pressure will ensure income gains. Even if the Euro rate increase presents a slight burden on the domestic export economy, it will continue to be supported by global trade almost without change, the more so as trade in the European domestic market is not affected by the exchange rate and can thus flourish without restriction.
Labor market benefits
The strong economic growth will continue to have a noticeably positive effect on the Austrian labor market. The growth in employment will increase to 1.8 percent on average for 2017. This represents an increase of around 65,000 jobs in total compared with the previous year. For the first time since 2011, the strong increase in the labor supply, primarily due to migration from other EU countries, can be more than compensated for, with the number of job seekers falling by 15,000.
“The unemployment rate will fall to 8.6 percent in 2017. In 2018, the labor market will continue to improve due to the strong upturn. We are optimistic that the 1.4 percent growth in employment year-on-year will be high enough to further reduce the unemployment rate to 8.2 percent as an annual average for 2018”, says Pudschedl.
Inflation 2017/18 above 2 percent
However, one downside to a strong economy is the trends in inflation. In the first ten months of this year, inflation increased to an average of 2.1 percent. On the one hand, the upturn in Austria has led to increased upwards price pressure. This is reflected above all in price rises for some services in tourism, leisure and cultural activities, as well as for residential rent, depending mainly on demographic factors. In addition, the higher price of oil since autumn has been reflected in the rate of inflation.
In 2018, an average increase to USD 62 per barrel of crude oil is to be expected, following on from an average price of around USD 55 in 2017. The impact of this increase in oil prices on inflation in Austria should be softened slightly, however, as the economists from UniCredit Bank Austria expect the euro to continue to strengthen against the US dollar.
“At 2.1 percent, the annual average inflation rate for 2017 is noticeably higher than the 0.9 percent rate of the previous year. Due to higher oil price forecasts for 2018, we now expect inflation to remain constant at 2.1 percent, while the upwards pressure on service prices on the side of demand will continue to be the deciding factor for inflation in Austria”, says Bruckbauer.
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Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 50505 - 41957