UniCredit Bank Austria Business Indicator:
Global economic concerns still on the rise despite rapid growth

  • Following an all-time high at the end of 2017, the UniCredit Bank Austria Business Indicator continued its slight downward trend in March with a decline to 4.4 points
  • Excellent mood among consumers and the construction industry, yet marked increase in uncertainty in export-oriented industry
  • Very strong 1st quarter 2018, but risks for economic slowdown have increased
  • Further drop in unemployment, although the improvement on the employment market is starting to lose momentum
  • At 2%, inflation in Austria above the Eurozone average for the tenth year in succession in 2018

Following an outstanding start to 2018, there are now more and more indications that the rapid pace of growth in the Austrian economy is starting to lose momentum somewhat. “The slight downward trend observed at the end of 2017 following the all-time high of the UniCredit Bank Austria Business Indicator continued in March with a drop to 4.4 points. However, the indicator is still at a very high level which, aside from the current economic cycle, was last seen early in 2007”, comments UniCredit Bank Austria Chief Economist Stefan Bruckbauer.

Despite the slight downward trend observed since the start of the year, the UniCredit Bank Austria Business Indicator recorded an average value of 4.5 points in the first three months of 2018 and thereby even broke the quarterly record from Q1 2007. “Underpinned by the excellent mood in the first quarter of 2018, which contributed to a quarterly record of the UniCredit Bank Austria Business Indicator, the economic growth recorded at the start of the year was very strong. The Austrian economy enjoyed a great start to 2018 and, based on our estimates, was able to achieve a year-on-year growth of around 3% in the first quarter”, comments Bruckbauer.

The current framework conditions for the Austrian economy remain favourable. However, the dip in the UniCredit Bank Austria Business Indicator in March can be attributed to a slight decline in the overall mood. “The sense of optimism in the domestic industry suffered in March as a result of the uncertainty caused by protectionist tendencies in international trade, as well as the increases in geopolitical tensions. This is also being accompanied by an export environment that is becoming increasingly difficult and putting downward pressure on the UniCredit Bank Austria Business Indicator. On the other hand, the mood among consumers, as well as at the enterprises geared more towards the domestic market such as construction, has not changed from the previous month. In fact, it has even enjoyed a slight improvement in some cases”, comments UniCredit Bank Austria economist Walter Pudschedl.

Alongside the slightly deteriorating mood in the Austrian economy, several early pointers also indicate a slowing down of economic activity since the start of the year. Signals coming from the stock markets also present cause for concern, yet not panic. After all, a moderate decline of several indicators should not really come as a surprise when starting from a phase of economic prosperity. “As expected, economic growth in Austria is likely to slow somewhat in the coming months as a result of reduced investment-based support and, to a lesser extent, also reduced consumption. Yet despite this, Austria's economy will still record strong growth of 2.8% in 2018. We are also still anticipating economic growth of 2% for 2019”, adds Pudschedl. However, the slight downward growth trend also brings additional risks with great potential to hamper general economic development. The protectionist foreign trade measures coming from the US, which could easily increase on the global stage, as well as the heightening of geopolitical discord with Russia could accelerate the economic slowdown to be anticipated.

Unemployment rate now scarcely falling
In light of the good economic situation, the situation on the Austrian employment market is also likely to continue improving. Indeed, 2017 was the first year since 2011 in which the unemployment rate fell in Austria, from 9.1% to 8.5% as an annual average. Including figures up to March 2018, the seasonally adjusted unemployment rate even fell to 7.8%. “As economic support has begun to fade slightly, we should expect to see lower employment growth in the coming months. The ongoing and strong increase in the supply of labour will therefore serve to slow the drop in unemployment somewhat. Given an increase in employment of 2.2% or 80,000 persons in absolute terms, we are anticipating a drop in the unemployment rate to 7.7% as an annual average for 2018”, comments Pudschedl. The pronounced increase in the supply of labour, which has been observed since 2011 as a result of the full free movement of workers and brings in at least 50,000 persons per year, is likely to continue unabated. This means that the employment situation in Austria must grow at least by this amount in order to achieve a reduction in unemployment. Given the moderate speed of growth expected for the Austrian economy in 2019, employment growth is also likely to continue slowing down. The unemployment rate will therefore fall to 7.6% in 2019.

Year-on-year inflation climbs above 2% in summer
In the first quarter of 2018, the year-on-year price increase declined to an average of 1.8%. Due to the high oil price, however, inflation is likely to exceed the 2% mark again over the course of the coming months, despite the ongoing dampening effect of the weak euro. “At 2.0%, we are anticipating slightly lower inflation as an annual average for 2018 than in the previous year. Due to continuing price pressure, we are also expecting price increases of around 2% for 2019, primarily for services. The inflation rate in Austria will therefore continue to markedly exceed the comparable figure for the rest of the Eurozone for the tenth year in succession”, according to Pudschedl.

Interest rate increase by the ECB expected in 2019
In the Eurozone, average inflation in the first quarter of 2018 was just 1.3%. 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.

“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 later in 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% is also likely at that point”, anticipates Bruckbauer.


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