UniCredit Bank Austria Business Indicator:
Domestic demand supports solid growth in Austria

  • UniCredit Bank Austria Business Indicator starts the third quarter of 2018 at 3.6 points: despite a decline after the all-time high at the turn of the year, the indicator remains clearly above the long-term average
  • Consumption and investments stabilize the pace of growth at over 2 percent
  • Effects of the Turkish crisis manageable, as less than 0.5 percent of Austrian demand depends on Turkey
  • Despite higher global risks: economic growth expected to reach 2 percent in 2019, after 2.8 percent in 2018
  • Improvement in the labour market is stagnating: after 7.7 percent in 2018, the unemployment rate will fall only slightly to 7.6 percent in 2019
  • Inflation visible since the middle of the year is only temporary: average annual inflation expected to rise to 2.2 percent in 2018, decline to 2.0 percent in 2019

At the beginning of the third quarter, the moderate decline in economic sentiment in Austria continued. Starting from a phase of clearly exuberant optimism, which was reflected in an all-time high of 4.5 points in December last year, the mood in the Austrian economy declined for the seventh month in succession in July. “Despite the seventh decline in a row, the UniCredit Bank Austria Business Indicator continues to clearly exceed the long-term average at 3.6 points, which speaks for a sustained solid growth rate in the coming months,” says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. The easing of economic sentiment in recent months is noticeable on a broad sectoral level and is reflected in the attitudes of both producers and consumers. “In July, Austria's positive economic outlook declined again somewhat. Business prospects in the export-dependent industries in particular are currently being limited by a further increase in global economic risks. On the other hand, however, there is a very clear improvement of the mood in the construction business,” says Bruckbauer.

Rising risks in the export environment, but risk of the Turkish crisis manageable for Austria
The slight decline in the UniCredit Bank Austria Business Indicator in July is mainly attributable to the rising challenges in exports. In the past six months, a series of new geopolitical risks and increasing protectionist tendencies have worsened the international environment for Austria's export-oriented industrial enterprises. The sub-indicator, which reflects the mood and prospects in the sales markets of domestic industry, exerted the strongest influence on the decline in the UniCredit Bank Austria economic indicator in July. Under the impression of increased uncertainty, which has a dampening effect on incoming orders, the mood in Austrian industry has also declined.

For some time now, refinancing difficulties have been expected for Turkey due to the double deficit in the current account and the state budget, although the political events of recent weeks have also led to a particularly sharp fall in the value of the Turkish currency. Despite the severity of the crisis and although a stabilization of the situation is desirable for many reasons, not least to reduce the levels of uncertainty, the direct and indirect effects on the economy in the euro area and Austria remain rather small. “With an export share of 0.9 percent, Turkey is only Austria's number 20 export partner, and with less than 1 percent of all Austrian direct investments in Turkey, the effects of the Turkish crisis on Austria's economy remain manageable,” says Bruckbauer, adding that “overall, less than 0.5 percent of Austria's demand depends on Turkey.”

Despite the high employment dynamics and rising wage growth that are spurring consumption, consumer confidence fell in July, and optimism in the services sector also declined. In July, only the construction industry countered the general slight downward trend in economic sentiment. A sharp increase in the number of orders on top of already high capacity utilization and a high degree of price assertiveness in this economic situation have raised business expectations for construction to a new all-time high.

Stable growth prospects for the second half of the year are above average
In the first half of the year, GDP growth in Austria was 2.8 percent. After a strong start to the year, however, economic growth slowed noticeably in the second quarter of 2018. The current UniCredit Bank Austria Business Indicator and a number of other existing early indicators signal a flattening of the economic slowdown and a stabilization of the growth rate. “For the second half of the year, we expect continued broad-based economic growth in the range of 2.5 to 3 percent. In addition to domestic demand, exports will also contribute to the GDP increase, which we expect to continue at 2.8 percent for 2018 as a whole,” said Bruckbauer. However, exports are not expected to support growth as strongly in the second half of the year. On the one hand, global trade has lost momentum. On the other hand, the good domestic economy continues to ensure a high level of import momentum. To an even greater extent than in the first half of the year, economic growth in the coming months will therefore be driven by domestic demand. Although private consumption will not quite be able to maintain the pace set so far, the good mood of consumers, the favorable situation on the labour market, and the increased wage dynamics continue to provide plenty of tailwind. Private consumption is expected to grow by 1.8 percent, the strongest growth in over a decade. Investments will also continue to grow strongly in the second half of the year. The degree of capacity utilization in the domestic economy, which is well above the long-term average, suggests a continuing need for invest in expansion in order to fulfil orders.

“For 2019, we expect economic growth of 2 percent, based on a continued strong domestic economy. With somewhat less support than in the current year, both private consumption and investment will contribute to growth above potential next year, for the third year in a row,” Bruckbauer expects. However, the prospects for foreign trade are subject to high uncertainties. Although the available indicators show a stabilization of global trade, the tightening of economic sanctions, and the protectionist US customs policy entail a high economic risk, particularly for the export-oriented Austrian economy.

Unemployment rate stagnating
In the first half of 2018, the unemployment rate averaged 7.9 percent, 0.9 percentage points below the previous year. However, seasonally adjusted data show that the unemployment rate has largely stagnated since the beginning of 2018 and even showed a slight upward trend to 7.8 percent in July. This is due firstly to the slowdown in employment growth on a monthly basis. Secondly, the number of job seekers has been rising again for two months including in July, and thirdly, training provision has been reduced. As a result, many previous training participants are now appearing in the unemployment statistics again.

“The improvement trend on the labour market in Austria is coming to an end. The unemployment rate will largely stagnate in the second half of the year because of lower employment growth due to the economic situation, a stable increase in the labour supply, and probably less support from training measures. On average, we expect an unemployment rate of 7.7 per cent for 2018,” says UniCredit Bank Austria economist Walter Pudschedl.

The economy will be strong enough in 2019 to generate a sturdy increase in employment, but at around 1.2 percent year-on-year it will only be about half as strong as in 2018. This means that the increase in employment will no longer be significantly higher than that of the labour supply, which is mainly determined by immigration. Unless the extent of training changes significantly, the unemployment rate will fall very little at best. The economists at UniCredit Bank Austria expect an annual average unemployment rate of 7.6 per cent in 2019.

Inflation on the rise for the time being
The slight upward trend in inflation in Austria that began in May will continue over the coming months. “In July, annual inflation is expected to have passed the 2 percent mark for the first time. Due to the higher oil price and the weaker euro exchange rate compared to the spring, inflation rates of as much as 2.5 percent are expected in the further course of the year. Average annual inflation is 2.2 percent,” says Pudschedl. The inflation rate in 2018 will thus be slightly higher than the 2.1 percent of the previous year. By spring 2019 at the latest, when the strong price rises of the current year fall out of the calculation, the oil-price-induced rise in inflation will end. Even though the continued strong domestic economy could lead to some price increases on the demand side, the average inflation rate of 2.0 percent in 2019 will be slightly lower than in the current year.


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