The upturn in Austria remains very dynamic at the start of 2018 but is no longer picking up speed. “We believe that the current economic cycle has now reached its peak. In January, the UniCredit Bank Austria Business Indicator did not gain from the previous month for the first time in two years. However, at 4.6 points, it is only slightly below the all-time high of December 2017, signalling that growth in the domestic economy will remain very robust in the coming months”, comments UniCredit Bank Austria’s Chief Economist Stefan Bruckbauer, adding: “We cannot see any signs of a downturn for the eurozone or Austria due to the turbulence on the markets in the last few days”. The current leading indicators and sentiment indicators within Austria and abroad are showing that the upward trend on the domestic market is by no means expected to end despite the economic peak being reached, although the pace of the upturn is now slowing and the rate of growth is stabilising at a high level.
The upward trend of the UniCredit Bank Austria Business Indicator over the last months came to an end in January due to the domestic sentiment. “Optimism is still strong in all sectors of the Austrian economy, but at the start of 2018 it did not quite reach the highs of the last few months. This affects both service providers and industry, particularly the construction sector. Yet the upswing in the export sentiment is continuing, bucking the trend”, comments Mr Bruckbauer. The indicator calculated by UniCredit Bank Austria to rate the export climate using industry confidence, measured based on Austrian foreign trade share, on a global level pointed to another slight acceleration in demand from abroad for Austrian goods at the start of the year.
The Austrian economy is still experiencing a strong economic tailwind at the start of 2018, alongside a very positive mood. “Economic growth in the first quarter of 2018 will be no different from the strong growth momentum in the past quarters. GDP will rise by around 3% again year-on-year. This will create an excellent basis for the Austrian economy to have another strong year with an above-average growth rate”, comments UniCredit Bank Austria Economist Walter Pudschedl.
The economic upswing in Austria will predominantly be bolstered by domestic demand again in 2018. Roughly nine tenths of economic growth is expected to come from consumption and investment, but foreign trade will likely have a greater influence than previously. The tailwind experienced by exports will strengthen in general due to the revitalisation of global trade, which is being buttressed by the upturn in some growth markets, particularly Asia, and the economic boost in the USA resulting from tax cuts.
However, the increasing strength of the euro against the US dollar will dampen export growth in 2018. Nevertheless, foreign trade will increase its net contribution to growth as the additional need for imports will decline. The slight slowdown in both investment and consumption growth will play a part in this. The upturn in investment is already in its fourth year. As a result, the former investment backlog has now been covered. However, the domestic economy’s high utilisation rate is a sign that there will be continuing momentum in equipment investments due to required capacity expansions in order to cover high demand. The flattening of consumption growth that set in after the 2016 tax reform will continue in 2018, particularly as the boost from higher employment will decline somewhat in the course of the year and nominal wage growth will barely be enough to produce rises in real income.
“Domestic demand is still developing extremely well and the Austrian economy is gaining strong support from abroad. Despite a number of geo-political risks, 2018 is expected to be another strong year. We anticipate economic growth of 2.6% in Austria”, comments Mr Pudschedl.
The outlook for the Austrian economy is still favourable for 2019, although as the economic cycle matures and global support declines – in particular from the USA, where a series of factors are leading to expectations of slower economic growth the year after tax cuts – the economy is expected to level out at a very solid growth rate of 2%.
Strong economy ensures continuing improvement on the labour market
“The economic tailwind will enable the unemployment rate in Austria to fall in 2018 for the second successive year. After an average rate of 8.5% in 2017, we are expecting unemployment to be at just 7.7% in 2018”, notes Mr Pudschedl.
However, employment growth in the coming months will not quite reach the levels seen last year. Nevertheless, the rise of just under 2% will be enough to compensate for the ongoing strong increase in the workforce, primarily due to immigration from other EU countries, besides reducing the number of jobseekers. Overall, the number of people registered as unemployed is expected to fall by up to 25,000 in 2018.
Marked price rises to continue in 2018, mainly for services
The perceptible upward pressure on prices, which is being boosted by strong demand in the current economic cycle, continued at the start of 2018. “Inflation in Austria will continue to be above 2% year-on-year in the next few months. We expect inflation to reach 2.1% on average in 2018, as it did last year. Increases in the euro rate will at least prevent any further price rises that could be sparked by the strong economy, in particular for services or due to higher oil prices”, expects Bruckbauer. Economists at UniCredit Bank Austria believe that the euro will significantly exceed the 1.30 mark against the US dollar in the course of 2018.
The recent increase in volatility on the financial markets is not expected to have a negative impact on the Austrian economy according to UniCredit Bank Austria’s economists. “The increased volatility on the financial markets is a typical side effect, particularly in the USA, where the economy is at the end of a long upswing”, comments Mr Bruckbauer, adding: “We will continue to see this phenomenon on the European markets too, but in a fundamentally much more positive growth environment for the real economy.”
Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 5 05 05-41957;