UniCredit Bank Austria Business Indicator:
Economy on the move, but risks associated with global protectionism increase

  • At 4.6 points, the UniCredit Bank Austria Business Indicator for February maintains the high value of the previous month just below the all-time high
  • The announced US tariffs currently pose barely any threat to the Austrian economic upturn, although a potential trade conflict hides a perceptible economic risk
  • The mood in industry and among consumers at its highest level since the financial crisis, although the export environment loses some of its lustre
  • After a dynamic start, slower growth expected from the middle of the year onwards: At 2.6 %, the 2018 GDP increase is barely lower than in 2017
  • At 2 %, the inflation rate in 2018 somewhat lower than previous year

The optimism with regards to the domestic economy fades as spring begins. At 4.6 points, the UniCredit Bank Austria Business Indicator for February shows no change from the previous month's high value, still hovering just below the all-time high at the end of 2017. “The economic mood is still positive, and for the first half of 2018, we can expect a growth rate of around 2.9 %, similar to the period of strong growth seen in 2017. However, we seem to have passed the peak of the economic cycle. This means that the Austrian economy should lose some of its growth from the middle of the year onwards, particularly because of the uncertainty associated with tensions in global trade triggered by the USA”, says UniCredit Bank Austria Chief economist Stefan Bruckbauer.

Economic risk associated with trade conflict
US President Donald Trump's announcement that tariffs will be introduced for steel and aluminium imports to the USA is seen by economists at UniCredit Bank Austria as a potential risk to the strong, synchronised, global growth from which the Austrian economy is currently benefiting. Although , for the most part, Austria would be affected to a greater extent by the announced tariffs compared to other European countries, the direct overall economic effects would be minimal in the short term. In 2017, domestic exports of steel and aluminium to the USA exceeded 400 million euros, which only corresponds to roughly 0.1 % of the total Austrian economic output.

“It is likely that the US tariffs that have been announced for steel and aluminium will affect the Austrian economy to a minimal extent. However, there is a risk of a vicious circle of reciprocal protectionist measures developing”, according to Bruckbauer, who continues: “In our assessment, the most probable risk scenario, that of increasing protectionist measures due to specific reactions, but not an actual trade conflict, involves a reduction in the dynamism of global trade from its current level of around 4.5 % by one percentage point. This means that global economic growth would fall by up to one percentage point to somewhere in the range between 3.0 and 3.5 %.”

Fading optimism in the construction and service sectors
Regardless of the risk of increasing protectionism, the excellent level of Austrian exports in previous months has lost some of its lustre as spring begins. The global industry sector sentiment indicator, weighted with the domestic shares of foreign trade, has gone down for the first time since summer 2016. The upward trend has come to an halt, particularly in terms of development in important markets such as Germany and France, as well as in certain Eastern European countries. However, the mood in domestic industry is still at a record high, due to the large backlogs of work.
The optimism of domestic consumers is unchanged, due to the continuing improvement in the domestic employment market. “The economic mood in Austria was improving continuously up to the start of 2018, but as spring gets underway, the upwind has subsided, and the current mood is less consistent. There is even a slight dampening of the current mood in the service and construction sectors, which is reflected in the stagnation of the UniCredit Bank Austria Business Indicator (4.6 points in February) despite record values among consumers and in industry”, according to Bruckbauer.

Positive outlook for 2018
Given the good start to the year and persistent positive mood, the Austrian economy is expected to maintain the high growth rate of the previous year in the first half of 2018, and to achieve a GDP increase of around 3 %.

However, as the year proceeds the growth rate of the Austrian economy should slow somewhat. The economic tailwind provided by demand from abroad is at risk of slowing down. The UniCredit Global Leading Indicator, which combines a series of early macroeconomic indicators from various countries and sectors into a single figure, currently indicates a slowing down in the dynamism of global trade, although the tariffs which have been announced by US President Trump have not as yet been included in any calculation.

“With something of a decrease in export business, economic growth in Austria in the second half of 2018 will be less than at the start of the year, and domestic demand in particular may wane. However, at 2.6 %, economic growth in Austria during 2018 will still be very strong, with this being the second year in succession to be above the long-term average”, claims UniCredit Bank Austria economist Walter Pudschedl. Moreover, economic growth will, as in 2017, be above the Eurozone average, and even exceed that of Germany once again.

Strength of euro dampens inflation
After an average of 2.1 % in 2017, inflation has fallen in the first two months of this year to 1.8 %. The rise in value of the euro against the US dollar plays a significant part in falling inflation, despite the strong economy. The increase in crude oil prices in 2017 from an average of over 20 %, when compared annually, continues unchanged at the start of 2018, at around 67 US dollars per barrel.
However, the stronger euro, which increased by around 15 % against the US dollar during the same period, represented something of a counterbalance. Due to the lower price base in summer 2017, the oil price at mid-year will provide a moderate rise in inflation. “After the fall to 1.8 % at the start of the year, inflation in mid-2018 will be above 2 % once more, despite the ongoing damping effect of the rise in value of the euro. The average inflation for 2018 should be around 2.0 %, slightly lower than the previous year”, claims Pudschedl. Economists at UniCredit Bank Austria assume that at the end of 2018, the euro will significantly exceed the 1.30 mark against the US dollar.


Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 5 05 05-41957;
E-mail: walter.pudschedl@unicreditgroup.at