Decline in growth rates in Austria due to increasing global uncertainty

  • UniCredit Bank Austria Business Indicator continues its slight downward trend in April, with a decline to 4.2 points
  • Uncertainty in the export-oriented industry has a detrimental impact
  • The domestic economy stabilises its growth trend in 2018, but support from foreign demand is slowing down, due to protectionism and rising uncertainty
  • Despite economic slowdown: GDP growth expected in 2018 unchanged at 2.8 percent
  • The decline in the unemployment rate is slowing down, however, at 7.7 percent on average in 2018, 0.8 percentage points lower than in 2017
  • From mid-2018, the oil price will cause inflation of over 2 percent year-on-year

The economic slowdown in Austria after the turn of the year 2017/18 will continue in the spring. “The UniCredit Bank Austria Business Indicator dropped to 4.2 points in April. The moderate yet steady decline in the economic climate in recent months continues at the beginning of the second quarter. The growth rate of the Austrian economy is still very attractive at the moment. Apart from the current cycle, our Business Indicator is at its highest level since mid-2007”, says UniCredit Bank Austria Chief Economist, Stefan Bruckbauer.

The very long recovery of the Austrian economy, which accelerated significantly after a rather sluggish start in 2015 as a result of the tax reform from mid-2016, culminated in the highest growth momentum in ten years, thanks to the global recovery in 2017. “Over the past four months, the excellent economic climate in Austria has been steadily losing ground. The current UniCredit Bank Austria Business Indicator signals a continuation of the slight downward trend and a further slowdown in the growth rate, especially as the export environment is becoming increasingly difficult,” said Bruckbauer.

The renewed decline in the UniCredit Bank Austria Business Indicator in April is, as in the months before, mainly due to the deterioration in business estimates in the export-oriented sectors of the Austrian economy. The domestic industrial companies are still above-average optimistic, the mood was dampened by a falling growth in orders from abroad, however it has been clearly eliminated owing to the peak around the turn of 2017/18.

More difficult export environment
The international industrial climate, weighted by Austrian foreign trade shares, as an indicator for the development of the export environment of the domestic economy, after only some significant declines in the previous months, currently only reaches the level of mid-2017, which, however, also coincided with quite high export momentum. The uncertainties of increasing protectionist tendencies in global trade and rising geopolitical risks, recently exacerbated by the US withdrawal from the nuclear agreements with Iran, dampen the prospects of export operations.

“The economic trend has clearly gone downwards since the beginning of 2018. However, the increasingly difficult export environment is counteracted by a largely stable domestic economy. The climate in domestic construction stabilised at a high level just before the beginning of the summer, and Austrian consumers are also optimistic,” says UniCredit Bank Austria Economist, Walter Pudschedl. While the optimism in construction is supported by the very good order situation, the easing in the labour market supports the continuing high spirits of consumers.

Following the decline in growth momentum in the first quarter of 2018, compared with the strong end of 2017, the economists at UniCredit Bank Austria expect further moderation in the recovery of the Austrian economy over coming months.

Foreign demand slows down
Foreign demand will continue to gain momentum by the end of the year as global trade recovery threatens to slow down. The strong demand for investment in many emerging markets, which is a key driver of high momentum, is likely to be more subdued with more limited capital inflows due to mounting uncertainty coupled with the upward trend in US interest rates. Due to the slowdown in export demand, Austrian companies will also slightly reduce their investment plans by the end of the year, even though equipment investments remain an important pillar of Austria’s economic growth, due to above-average capacity utilisation and continued favourable financing conditions.

Construction and consumption remain strong
Construction investment will also continue a solid upward trend thanks to the very good order situation. In addition, private consumption in the current year continues to provide largely stable support for the growth of the domestic economy. This is based on a strong growth in the employment rate, which is lagging behind the economic trend, and coupled with slightly higher wage growth than in 2017, is associated with a noticeable increase in disposable income. “After economic growth of 3 percent in the previous year, we continue to expect a strong gain of 2.8 percent for 2018. While the domestic economy continues to show strength, we clearly see the reason for the moderation of the growth rate and the increasing downward forecasting risk in foreign demand,” says Pudschedl.

Geopolitical dissonances
The downward trend of the economy could be noticeably exacerbated in the coming months. In addition to the protectionist measures in international trade originating from the US, which could lead to further new trade barriers in the near future, there is a risk of increasing geopolitical dissonance as an intensification to uncertainties for the global economy. “The US exit from the nuclear agreement with Iran and the announcement of tightened sanctions will not be without consequences for the global economy. The further increase in geopolitical tensions, based on the uncertainty caused by the introduction of US import tariffs, could afflict global trade and furthermore decrease the willingness to invest globally. The heavily export-oriented Austrian economy is disproportionately affected by such framework changes,” says Bruckbauer. The economic slowdown will continue in 2019 and will only allow economic growth of 2.0 percent, even in a modest risk scenario. However, GDP growth in Austria will remain above the long-term average.

Improvement in the labour market tapers off
The unemployment rate (seasonally adjusted) was 7.8 percent in April. This represents a decline of 0.8 percentage points compared to the previous year. As a result, the unemployment rate drops significantly for the second year in a row, even with a slight upward trend compared to the previous year. “The economic slowdown that is already underway will slowly bring the improvement in the domestic labour market to a halt over the coming months. A further decline in the unemployment rate is no longer expected from summer 2018, since the generally declining employment growth faces a strong increase in labour supply,” says Pudschedl. For the whole of 2018, the average unemployment rate is 7.7 percent. In view of the more moderate growth rate of the Austrian economy in 2019, employment growth will continue to slow down. In 2019, the unemployment rate will only fall to 7.6 percent.

The price of oil ensures at least temporary rising inflation
After an average of 1.8 percent year-on-year in the first quarter of 2018, inflation in Austria is expected to show a slight upward trend. The price of oil has risen sharply in recent weeks, climbing to more than $75 per barrel over the previous year, in light of the uncertainty surrounding the US withdrawal from its nuclear deal with Iran, which represents a gain of 30 percent compared with the previous year.

As the upward trend of the euro against the US dollar has not continued in recent weeks, the significantly dampening effect of the exchange rate development to date has also decreased. “By summer at the latest, inflation in Austria will again rise above the 2 percent mark, due to noticeably higher oil prices compared to the previous year. Based on the lower figures at the beginning of the year, average inflation of 2 percent is expected in 2018, compared with 2.1 percent in the previous year,” says Bruckbauer.

The price of oil remains an important factor that influences domestic inflation. Assuming that the oil price remains at the current high level and the euro exchange rate remains stable against the US dollar, inflation in Austria would be about 0.3 percentage points higher than currently expected in 2018.


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