UniCredit Bank Austria economic appraisal 2018/19:
Robust economic growth to continue in 2018 – growing economic headwinds not expected until 2019
- Global upturn will continue in 2018
- US benefits from tax reductions: economic growth will again accelerate in 2018, but initial signs of a prospective downturn in 2019
- Euro area remains very dynamic: anticipated GDP growth of 2.3% in 2018 and 1.9% in 2019, an only slight decline
- The ECB will discontinue its net asset purchases at the end of 2018 and will follow the Fed by raising interest rates in the middle of 2019 or thereafter
- Austria is experiencing an investment boom: 2017 will see investment growth of 3%, the strongest in 10 years
- The upturn in Austria will continue in 2018 and 2019, with GDP growth of 2.4% and 2.0%, respectively, resulting in a further decline in unemployment.
The global economy picked up at a robust pace in 2017, with growth accelerating to an estimated 3.6%, a seven-year high. Stefan Bruckbauer, UniCredit Bank Austria’s Chief Economist, describes the global economic prospects for 2018: “The situation can hardly be better”, adding “Next year global economic growth will accelerate to about 3.9%. The sustained, further global recovery in 2018 is attributable to four key factors: increasingly synchronous growth, the revival of global trade, the growing importance of investment for the growth momentum, and a largely expansive economic policy.” At around 3.5%, global economic growth will remain robust in 2019.
The bright outlook for the global economy in 2018 and 2019 is supported by a number of factors: first, global growth has also extended to the various regions. Recovery is taking place synchronously in industrial countries and in the emerging economies, thereby reinforcing the upturn through positive spill-over effects. Secondly, the simultaneous recovery in many countries boosted global trade to about 4%, a momentum which will continue. Trade elasticity, which is the ratio of global trade growth to global GDP growth, again returned to over 1 in 2017 after a number of weaker years. Thirdly, global economic growth is increasingly being driven more by investment than by consumption. The upswing is consequently more broadly based and balanced, and the combination of stronger export demand, brighter sentiment and increasing capacity utilisation points to a higher growth potential. Finally, a largely expansive economic policy is likely to continue to promote global growth. Both monetary policy and fiscal policy will for the most part remain expansive.
A last flourish of the US economy thanks to tax reform measures
The US economy, in particular, is likely to benefit from fiscal policy measures in 2018. “After growing by 2.2% in 2017, economic growth in the US will accelerate to 2.6% in 2018 thanks to tax reductions. However, the third-longest upturn experienced by the US economy since the 1850s is expected to fizzle out towards the end of the year as the fiscal impetus tapers off. 2019 will probably still see GDP growth of 2%” says Bruckbauer. There are signs that growth will level off from 2019, given weaker support from prosperity effects, energy-related investment and global growth.
Upturn in the euro area is in full swing
The recovery experienced by the euro area since the middle of 2013 has temporarily peaked in 2017. “In 2017 the euro area economy expanded by 2.3%, the strongest growth rate in ten years. In addition, all euro area countries are enjoying growth for the first time since the financial crisis, and the economic upturn is evenly spread across all regions. Since the introduction of the euro, the distribution of growth rates among the euro area countries has never been as insignificant as in 2017” says Bruckbauer. The broad-based recovery will continue in 2018, again with economic growth of 2.3% driven by the sound recovery of investment activity and consumption, with the latter benefiting from the higher employment levels. The impetus from foreign trade will ease off, most likely resulting in a slight reduction of GDP growth to 1.9% in 2019.
European monetary policy will gradually return to normal – with a four-year lag to the US
Despite the favourable economic trend, the euro area’s inflation rate will still fall short of the European Central Bank’s (ECB) target of not quite 2% because the output gap resulting from the financial crisis has not yet been entirely closed and because wages are still rising at an only moderate rate despite falling unemployment. “The further narrowing of the output gap should in the coming years at least create conditions for a flat upward trend of core inflation. This is why we believe that the ECB will terminate its policy of quantitative easing at the end of 2018 and start to raise interest rates for deposits in the middle of 2019” says Bruckbauer.
The normalisation of monetary policy in Europe is lagging behind the US by about four years, reflecting the delay of the equally long economic upturn in the euro area after the “euro crisis”. While the Fed discontinued its bond-purchase programme in October 2014, the ECB is not expected to follow suit before the end of 2018. A normalisation of interest rates, with a 20 basis point increase in the interest rate payable on deposits, will probably not take place before the middle of 2019. A further measure in regard to the deposit interest rate, at the end of 2019, is likely to end the five-year period of negative interest rates. Then, the refinancing rate will probably be increased to 0.25%.
Strong momentum also in Austria
The Austrian economy grew at an unexpectedly strong rate in 2017, supported by a favourable global environment. “In Austria, economic growth accelerated to 3% in 2017, driven by an exceptionally strong investment boom and continued strong consumption. Combined with robust support from global demand, strong domestic demand led to the strongest growth rate in ten years” explains Walter Pudschedl, economist at UniCredit Bank Austria.
The rise of UniCredit Bank Austria’s current Business Indicator to 4.5 suggests that much of the Austrian economy’s momentum in 2017 will be carried over into 2018, and Austria can continue its upturn. Domestic demand will remain the engine of growth for the Austrian economy in 2018 and 2019, although consumption and investment, in particular, are likely to slow slightly. In addition to the favourable business sentiment, especially in the areas of construction and manufacture of capital goods, investment activity in 2018 will continue to be supported by a combination of increasing profitability and sound corporate liquidity, as well as favourable financing conditions. In addition, capacity utilisation is now well above the multi-year average, pointing to imminent investment in expansion.
Improved labour market situation boosts consumption
While private consumption will, in 2018, not be supported by fresh fiscal stimuli such as those provided by the last tax reform, the continued improvement of the labour market situation points to largely sustainable, strong economic growth. “Boosted by the robust economic performance, the next two years are likely to see a further significant rise in employment, reducing unemployment levels in Austria despite an increase in the labour supply. After averaging 8.5% in 2017, unemployment will continue to fall to 8.1% in 2018 and 8% in 2019” says Pudschedl.
Higher inflation impacts real wages and consumption
Besides the easing of the labour market, it is the increase in wages which was responsible for the turnaround in consumer sentiment in Austria. The increase is however partly offset by the relatively high inflation rate, a factor which will curb consumption also in the next few years. Austria’s inflation rate has risen by about 17% on a cumulative basis since the end of the financial crisis, compared with only 11% in Germany.
This difference is reflected in lower real wage growth in Austria, given more or less similar nominal wage growth trends in both countries. Austria is also likely to record a higher inflation rate vis-à-vis Germany over the next few years. “Austria’s inflation rate will remain at 2.1% in 2018, falling only slightly to 1.9% in 2019. The upward pressure from services, on the demand side, still accounts for the approximately one half of a percentage point higher inflation rate vis-à-vis Germany” says Pudschedl.
Weaker support from domestic demand will cause the growth rate of the Austrian economy to slow slightly in 2018/19. Nevertheless, at 2.4% in 2018 and 2.0% in 2019, GDP growth will remain above Austria’s potential growth rate.
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Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, tel. +43 (0) 50505 - 41957
e-mail: walter.pudschedl@unicreditgroup.at