The Austrian economy finished last year on a significant high. The strong economic tailwind that was noticeable throughout the entire year continued uninterrupted at the end of 2017. “In December 2017, the UniCredit Bank Austria business indicator rose to 5.0 points, the highest value since its first calculation in 1999. This signals a prolonged, robust upturn that does not currently show any sign of slowing down”, says Stefan Bruckbauer, Chief Economist at UniCredit Bank Austria. In Q4 2017, the indicator climbed to an average of 4.6 points, with which it managed to even slightly surpass the former record from the spring of 2007. “Due to the continued rise of the UniCredit Bank Austria business indicator to a new record high, we can assume that the Austrian economy was able to significantly grow once again in the fourth quarter of 2017”, explains Bruckbauer in his analysis, adding: “The strong domestic demand combined with the acceleration of global trade has ensured a level of economic growth that could even have exceeded the 3 percent mark in 2017 for the first time in a decade. This has also resulted in GDP growth more than doubling in comparison to 2016.”
Austria's economy begins the year in high spirits
“A continuing broad improvement in mood supported the rise in the UniCredit Bank Austria business indicator in December. Both consumers and employers are going into the new year with plenty of confidence”, says Walter Pudschedl, Economist at UniCredit Bank Austria. All components of the UniCredit Bank Austria business indicator rose to multi-year highs in December. The increase in global trade has been beneficial for the mood in industry and export, while the improvement on the labour market is supporting consumer confidence.
The services sector is feeling a significant amount of tailwind, as was last experienced in 2000. Only the mood in the construction industry became somewhat sedate at the end of 2017, yet this follows on from a record high in the previous month. Overall, however, the particularly positive mood at present appears to somewhat exceed the actual growth dynamic of the Austrian economy.
Strong growth also expected in 2018, particularly supported by international demand
In light of the excellent mood, it can be assumed that the brisk upturn in Austria will also continue into 2018. The demand from abroad will play a decisive role in supporting this, once the global trade dynamic has improved from a moderate 1 percent to around 4 percent. Furthermore, existing early indicators provisionally point to a continuation of strong global trade, based on the synchronous economic recovery on a broad scale across many industrialised and emerging countries.
In 2017, the export of Austrian goods increased by an estimated 8 percent to a new record level of EUR 141 billion. In spite of the outstanding backlogs of work in the Austrian export economy at present, the rate of export growth in 2018 will nevertheless be somewhat lower, in part due to a little more headwind caused by further strengthening of the euro. Following on from an exchange rate of around USD 1.20 to EUR 1.00 at the turn of the year, the downward convergence of the US dollar towards equilibrium is expected to continue. At the end of 2018, the exchange rate of the euro against the US dollar may well approach the fair value of 1.25, favoured by rising portfolio inflows and the decreasing European risk assessment.
High capacity utilisation continues to promise high investments
The excellent demand for exports is a decisive stimulus for the ongoing investment boom in Austria, although the dynamic of this may well have reached its high point in 2017. Nevertheless, the strong growth in investments will persist in the first few months of 2018, since the average capacity utilisation clearly increased towards the end of 2017 and significantly exceeds the long-term average, which should entail further investments in expansion.
Moreover, the liquidity situation of the companies is robust and the financing conditions remain very favourable. The already long duration of the investment cycle, as well as the shift of focus from replacement investments to investments in expansion, will however reduce the rate of investment growth later in the year. In light of the current development of orders, this will probably be most perceptible within the construction sector.
Consumption benefits from increased employment
Private consumption will continue to increase in 2018 at a sustained high rate, based on the strong employment growth of around 2 percent (or 70,000 people) in 2017. The wage pressure will generally rise slightly owing to a continued sharp rise in employment of around 1.5 percent, which will provide further support for consumption. However, a slowdown of the growth dynamic is also expected for consumption over the course of 2018, since the wage pressure will be subdued due to the continued rapid rise in labour supply. Moreover, the inflation rate, which is high compared to the rest of Europe, is slowing down real wage developments and curbing consumption.
“The Austrian economy will initially be able to continue the growth rate of 2017 in the first few months of 2018, supported by strong demand from abroad and plenty of momentum through investments and consumption. During the rest of the year, it will likely no longer be possible to maintain this high rate in its entirety. The rise in GDP will slightly lag behind the 2017 result at around 2.5 percent in 2018”, says Pudschedl. This can be understood as an upcoming normalisation of a remarkably high level and not as an actual economic downturn.
Inflation remains above 2 percent at present in comparison with previous year
The upturn in Austria has led to increased upwards price pressure. “The inflation rate rose to an average of 2.1 percent in 2017. The main factors contributing to this included price surges in some tourism services, leisure and cultural activities and residential rents. We also anticipate inflation in the region of around 2 percent in both 2018 and 2019, owing to continued price pressure in the services sector in particular, as well as due to slightly higher oil prices. The inflation rate in Austria will therefore continue to markedly exceed the comparable figure for the Eurozone, making 2018 the tenth year in succession”, according to Pudschedl.
Interest rate rise by the ECB is not expected until 2019 at the earliest
Inflation in the Eurozone nevertheless remains weak in 2018, at a rate of 1.5 percent. The continued decline of the output gap should, however, ensure a flat upward trend in core inflation. Therefore, the European Central Bank is expected to conclude its quantitative easing at the end of 2018 and begin increasing the deposit rate in the middle of 2019.
The normalisation of monetary policy in Europe is following the path of the USA with a time interval of around four years, owing to the equally long delay of the economic upturn in the Eurozone as a result of the “euro crisis”. While the US Federal Reserve ended its asset purchase programme in October 2014, it is expected that the ECB will not stop net new purchases until the end of 2018.
“In our view, the normalisation of the interest rate level in the Eurozone will begin in the middle of 2019 with an increase in the deposit rate of 20 basis points. Only in the second half of 2019 should a further step in the deposit rate end the negative interest phase after five years. An increase in the refinancing rate to 0.25 percent is also likely at that point”, anticipates Bruckbauer.
Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 50505-41957