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15.06.2018

UNICREDIT BANK AUSTRIA Economic Indicator:
During this sustained economic boom, Austria’s economy loses momentum -- inflation rises slightly

  • The UniCredit Bank Austria Business Indicator sunk 3.9 points in May
  • The declining international support has slowed down the growth rate since the beginning of the year, nevertheless the growth rate for the first half of the year was over 3 percent
  • Stabilization of the sentiment is expected in the second half of the year: The growth rate should even out to a solid level
  • The GDP growth expected in 2018 remains strong at 2.8 percent
  • Oil prices and a stronger US dollar increase inflation: ECB initiates monetary normalization with balanced forward guidance

The economic boom in Austria continues, but the momentum has steadily declined since a strong beginning to the year. “After an all time high in December, the UniCredit Bank Austria Business Indicator has decreased in May for the fifth month in a row. With a high of 3.9, the indicator shows, in spite of the decline, a solid growth dynamic for the domestic economy into the middle of 2018,” says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.

The increase in geopolitical uncertainties and rising global challenges have had an unfavourable effect on exports for some months, which is now also reflected in a slight deflation in the mood of the domestic economy. “The Austrian economic downturn in May was felt on a broad scale. Confidence in all sectors of the economy has decreased slightly, with both producers and consumers being slightly less optimistic than in the previous month. After a strong start to the year with a GDP increase of 3.4 percent compared to the previous year, the rate of economic growth in the second quarter of the year should have been somewhat slower, but again amounted to more than 3 percent year-on-year,” says Bruckbauer.

The further reduction in the UniCredit Bank Austria economic indicator can be attributed to the general decline in economic sentiment. The economic support from the exports sector is losing further momentum. The emerging markets, which have provided much momentum for the international economy in recent months, are feeling the uncertainty of protectionist tendencies in trade policy and rising interest rates in the US, leading to less capital flowing into the emerging markets.

The changes in the global export environment have dampened the positive mood in Austria’s exporting industry again in May. “The decline in the economic mood of the domestic economy had a large impact on the decline in the UniCredit Bank Austria Economic Indicator in May. Optimism has fallen somewhat in the construction and especially in the service industry. Consumer sentiment has also peaked despite the excellent development of employment. Overall, however, the economic mood in Austria is still the best it has been in over 10 years, "says UniCredit Bank Austria economist Walter Pudschedl.

Despite the somewhat slower pace of growth compared to the very good start to the year, the Austrian economy was expected to achieve an average annual GDP increase of more than 3 percent in the first half of 2018. This even exceeded growth in 2017 as a whole.

Growth stabilization at a solid level
Even though consumer sentiment in the middle 2018 in Austria is further dampened, the economists of the UniCredit Bank Austria evaluate the growth prospects for the coming months to be nevertheless positive. On the one hand, economic sentiment in all sectors has reached record levels at the turn of the year and continues to be very good. On the other hand, assistance from the international environment

has slowed down, and current leading indicators point to a stabilization of global trade dynamics in the coming months.

“The growth rate of the Austrian economy will settle at a solid 2 percent in the second half of the year. This means that GDP will continue to grow by 2.8 per cent over the year 2018, "says Pudschedl. The momentum will mainly derive from domestic demand. While investment may provide less support than before in the coming months, private sector consumption continues to be buoyed by strong employment rate growth and more movement in wages. In light of protectionist measures in international trade coming from the USA and rising uncertainty through geopolitical tensions, the forecasting risks however are down.

Inflation rises further over 2 percent mark
With an average 1.8 percent year-over-year in the first five months of the year, inflation in Austria is marginally less than in the previous year. The relatively lower price increase of crude oil and the weakening of the US dollar against the euro contributed to this. Meanwhile, a turn around has begun. In May, inflation rose 1.9 percent year-on-year. Oil prices are about 20 percent above the level at the beginning of the year and even 50 percent higher than a year ago given the uncertainty surrounding the United States calling off the nuclear agreement with Iran. In addition to this, the significant dampening effect of exchange rates has been reduced, as the Euro has lost around 5% against the US dollar in recent weeks.

"The upward trend of inflation in Austria will continue in the coming months to over 2 percent year-on-year. The combination of higher oil prices and less exchange rate support will raise inflation somewhat more than we previously thought. That is why we have increased our inflation forecast for 2018 from the previous 2.0 to 2.2 percent. This is why consumer prices will increase slightly more than in 2017,” says Bruckbauer.

In the eurozone as a whole, the higher oil prices, but also the economic recovery, which brings movement into wage dynamics, will ensure an upward trend in inflation over the coming months. The rise in inflation to an average of 1.7 percent on average in 2018 will allow the ECB to initiate the normalisation of monetary policy. The ECB will phase out the asset purchase programme as expected at the end of 2018 and has announced that it will not consider an interest rate change until the end of the summer of 2019. “The announcement of the end of special monetary measures and at the same time the assurance that interest rates will stay stable for a long period of time despite the growing uncertainties is a very balanced signal from the ECB to the markets. However, our previous expectation of a first interest rate hike in June next year may prove overly optimistic,” says Bruckbauer.

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