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13.07.2018

UniCredit Bank Austria economic indicator:
Economic sentiment is stabilising, continued high-speed growth in Austria

  • UniCredit Bank Austria economic indicator unchanged in June at 3.9 points
  • Only slight economic weakening since the beginning of the year: Economic growth of more than 3 percent by annual comparison in Q2/2018
  • Stabilisation of the pace of growth in the second half of the year continues to allow the expectation of a GDP increase of 2.8 percent for 2018
  • In spite of increasing risks, economic growth in 2019 remains above the potential at 2 percent
  • Improvement in the labour market is losing momentum: after 7.7 percent in 2018, the unemployment rate will only fall slightly to 7.6 percent in 2019
  • Slightly rising inflation in 2018 to 2.2 percent due to the higher oil price. Minor decline to 2.0 percent expected in 2019
  • In spite of the termination of the ECB asset purchasing programme, monetary policy remains expansionary: possible interest rate rises in autumn 2019 at the earliest

 

Economic sentiment stabilised in mid-2018. Economic growth will settle into a solid pace in Austria, in spite of the high-risk environment. “The UniCredit Bank Austria Business Indicator reached 3.9 points in June, which was unchanged in comparison to the previous month. In the second quarter, the 10-year high of the starting quarter could no longer be attained, however, the average of 4.0 points emphasises the continued very strong tailwind for the domestic economy. After the increase in GDP by 3.4 percent at the beginning of 2018, we assume a slightly lower gain of just over 3 percent for the second quarter year on year,” says UniCredit Bank Austria Chief Economist, Stefan Bruckbauer. In the first half of the year, economic growth in Austria is therefore just over 3 percent in a year-on-year comparison. This corresponds to the strongest momentum since the first half of 2011, when the recovery from the recession started, following the 2008/2009 financial crisis.

The substantial decline in economic sentiment, which noticeably suppressed the performance of the UniCredit Bank Austria Business Indicator in the past months, was nearly stopped in June. The considerably improved mood in the services sector made a contribution to this and managed to largely offset the declining optimism in the export-oriented domestic industry, within a global export environment which is burdened by protectionist tendencies and geopolitical tensions. Furthermore, the deterioration appears to be easing due to the international environment. In the meantime, a series of early indicators suggest a stabilisation of the momentum in global trade. “After the strong year-on-year change, the growth rate of the Austrian economy has stabilised towards the middle of 2018. Most of the sentiment indicators are at a level that also gives rise to expectations of solid economic momentum of more than 2 percent in the second half of the year. In spite of increased risks due to the escalation of the trade conflict between the USA and China, we are sticking to our growth forecast of 2.8 percent for the entire year 2018,” says Bruckbauer.

The growth impulses will also come mainly from domestic demand in the second half of 2018 and beyond. The strong rise in employment and the slightly higher upward trend in wages will continue to keep private consumption robust. Demand for investment is also performing very dynamically, as the capacity utilisation of the domestic economy is noticeably above the long-term average and the order situation continues to be positive. Furthermore, the financing conditions are very favourable within the existing monetary policy framework. However, as the backlog in the cautious investment policy until 2016 appears to be covered in the meantime, investment momentum will lose speed slightly in the coming months. This will dampen demand for imports. Even if the implications of the previous customs policy measures of the USA on domestic exports remain reasonable, exports will no longer grow as substantially as at the beginning of 2018, as the support from emerging markets, in particular, will decline. However, the contribution of foreign trade to economic growth should continue to remain positive. “The growth will also remain widely supported in Austria in 2019. In addition to domestic demand, exports should also contribute to growth, albeit with slightly less strength under the impact of rising protectionism. At 2 percent, we estimate that GDP growth will also be above the long-term average in 2019 and will furthermore exceed that in the eurozone, as well as in Germany,” says Bruckbauer.

Only a moderate improvement is now expected in the labour market
In view of the favourable economy, the situation in the labour market has improved significantly in the first half of 2018, compared to the previous year. The unemployment rate fell by 0.8 percentage points to an average of 8 percent. A strong increase in employment of 2.6 percent, or more than 90,000 people, is the reason behind this. Due to the continued strong rise in the supply of labour, the number of job seekers fell only by slightly more than 30,000 people during the same period. However, the seasonally-adjusted data show that since the beginning of 2018 the situation in the Austrian labour market has only improved slowly. Seasonally adjusted employment growth is losing speed and the number of job seekers is only declining marginally, particularly as the supply of labour is starting to grow slightly more intensively. The seasonally adjusted unemployment rate at mid-year stands at 7.8 percent. “In the coming months, the situation in the labour market will only improve slightly, as the economy is no longer quite as strong. As an annual average in 2018, we expect an unemployment rate of 7.7 percent and for 2019, only a slight decline to 7.6 percent, as the growth in employment and supply of labour will align with one another. Therefore, the unemployment rate will continue to be substantially higher than prior to the financial crisis,” says UniCredit Bank Austria Economist Walter Pudschedl. In 2008, prior to the outbreak of the financial crisis and prior to the labour market opening up to the new EU members, the unemployment rate was 5.9 percent.

In the second half of the year, inflation will rise above 2 percent permanently
After inflation figures were below 2 percent during the first months of 2018 on a steady basis by year-on-year comparison, the rate has moved upwards slightly in Austria since May. In June inflation prospectively moved above the 2 percent mark for the first time in the current year. For the first half of the year, this results in average inflation of 1.9 percent. “Higher oil prices and the slightly weaker euro in comparison to previous years will cause rising inflation. In the second half of the year, inflation will amount to more than 2 percent permanently, particularly as the high employment momentum and the substantial rise in wages should cause stronger price growth, also due to demand. With an average of 2.2 percent in the full year of 2018, we expect the highest inflation in six years for Austria,” says Pudschedl. While the oil price should no longer exert much of an inflation-driving influence in 2019, higher demand for services should ensure more price growth. Overall, at an average of 2.0 percent, inflation in 2019 should be slightly lower than in the current year.

No end to negative interest rates until 2020
In view of the slight upward trend of inflation, also in the eurozone, the European Central Bank has initiated the normalisation of its monetary policy. The asset purchasing programme will be discontinued at the end of 2018. From the beginning of 2019, the ECB will no longer increase its holdings, but will continue to replace maturing bonds completely with new securities and thereby further crucially dampen the interest rate level in Europe. Furthermore, with its announcement that key interest rates will remain at their current level “at least beyond summer 2019”, the expectation of the markets regarding interest rate increases will be postponed further. “The announcement of an initial key interest rate increase in the eurozone by prospectively 20 basis points is no longer expected in June, but rather in September 2019 at the earliest. Therefore, the ECB will not leave the phase of negative interest rates behind it until the first months of 2020, however, after this, the window should begin to close for further interest rate normalisation,” says Pudschedl.

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