UniCredit Bank Austria economic indicator:
Economic outlook for Austria remains favourable despite global risks
- UniCredit Bank Austria economic indicator reaches 3.5 points again in August: Decline seen in the first half of 2018 comes to an end
- Economic growth stabilises at around 2.5 per cent in the second half of the year thanks to sustained strong domestic demand and a slight renewal of strength in exports
- After expected economic growth of 2.8 per cent in 2018, Austria will remain on the fast track in Europe in 2019: At 2 per cent, an above-average increase in GDP is expected for the third year in a row
- Trend of improvement in the labour market falters: Strong employment trend cannot fully keep pace with increase in labour force potential
- Inflation remains higher than in Germany in 2018 and 2019 at 2.2 and 2.0 per cent, respectively: Loss of around 5 per cent in price competitiveness compared to Germany since 2009
Following the steady decline from the record high at the turn of the year, economic sentiment in Austria has stabilised at what remains a high level at the end of the summer. “The deterioration in economic sentiment seen during the first half of 2018 has come to an end. In August, the UniCredit Bank Austria economic indicator reached 3.5 points. For the first time in the current year, it stayed at the same level as the previous month; this is a sign that the growth rate of the Austrian economy is stabilising,” says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. After the strong economic growth at the beginning of the year of 3.4 per cent year-on-year, the decline in the indicator was reflected in a significantly lower growth rate of 2.3 per cent in the spring of this year. The stable high level of the indicator over the summer is an indication that the pace of growth is no longer slowing and that the Austrian economy will achieve GDP growth of at least 2.5 per cent year-on-year in the third quarter of 2018.
“The stabilisation of the growth rate is due in part to sustained strong domestic demand, which is supported by consumer optimism and the upbeat mood in the construction sector, among other things. In addition, the downward trend in foreign demand has now slowed down and there are even signs of a reversal of the trend,” Bruckbauer states. He continues: “The international export environment has stabilised and sentiment in export-oriented industries has stopped its decline.” In fact, orders placed with Austrian industry from abroad have been on the rise again since the end of the summer, and there is an especially strong tailwind blowing from Germany, the country’s most important trading partner. Global trade is picking up some momentum again despite the crossfire caused by protectionist measures, especially as concerns about the far-reaching consequences of the Turkish crisis are proving to be unfounded. Based on this, sentiment in domestic industry improved again in August. Sentiment in the other sectors outside the export sector also remains excellent. The continuing strong optimism among domestic consumers had a positive impact on the business outlook of service providers in August. The easing of tensions in the labour market has boosted sentiment. The full order books in construction are keeping the mood positive in this sector. This means that economic sentiment in Austria has been significantly better than at the pan-European level for a year now.
Strong growth continues
“The Austrian economy should continue to grow strongly in the coming months. We therefore continue to expect GDP to rise by 2.8 per cent on average in 2018. Based on current indicators, we are once again more optimistic about the existing support for domestic exports from global trade,” states Bruckbauer. In addition, the US economy has recorded strong growth, boosted by tax reform, and continues to have a positive impact on the European economy. The exchange rate, which is expected to rise slightly in the coming months towards 1.20 US dollars for one euro at the end of 2018, is not expected to have a negative impact on this picture. Different geopolitical uncertainties such as Brexit could put the euro under pressure at times, but the fundamental strength of the European economy and the coming normalisation of monetary policy by the ECB should support the upward trend.
The most important pillar of economic growth as we enter 2019 will remain private consumption, which will be a driving force thanks to high employment growth and rising wage trends. Support from capital investment, on the other hand, will weaken somewhat. Although the construction industry will continue to provide a strong tailwind, capital spending will decline, given what is already a long investment cycle. Despite the uncertainties caused by protectionist US tariff policies, foreign trade should again be able to contribute to growth of 2 per cent in Austria in 2019. This should enable the Austrian economy to outperform the European and German economies for the third consecutive year.
Unemployment rate increases in the summer
“The slowdown in the economic upturn since the spring has brought an end to the improvement in the situation on the Austrian labour market. The decisive factor is the slowdown in employment growth. The additional workers entering the labour market can no longer be fully absorbed, especially since the number of training courses on offer has been reduced,” says UniCredit Bank Austria Economist Walter Pudschedl. While employment in the first eight months of 2018 was 2.6 per cent higher than a year ago and the number of job seekers was more than 9 per cent or 30,000 lower, the seasonally-adjusted unemployment rate moved slightly upwards to 7.8 per cent in August. At the beginning of the year, an average of more than 9,000 additional jobs were still being created each month. However, job creation during the summer fell to just over 5,000 per month, which, combined with fewer training measures since June, has led to a slight increase in the number of job seekers. The increase in the labour force potential has remained relatively constant at just over 4,000 people per month.
“We expect an average annual unemployment rate of 7.7 per cent in 2018 and only a moderate improvement to 7.6 per cent in the coming year, especially as structural problems are becoming increasingly apparent. The balance in terms of qualifications between supply and demand on the domestic labour market is likely to have declined in recent months," says Pudschedl. In addition to unemployment, the number of reported job vacancies continues to rise sharply. At 1.9, the job vacancy rate, the number of job vacancies in relation to the supply of labour, has reached a record level that is significantly higher than in the boom phase before the onset of the financial crisis.
Price dynamics remain higher than in Germany
Analogous to the development of the unemployment rate, following a decline, the inflation in Austria has also shown a slight upward trend since the summer. In the first eight months, inflation in Austria averaged 2.0 per cent or 2.2 per cent (HICP). This means that inflation is still above the comparable figure of 1.7 per cent in neighbouring Germany, although the gap has narrowed in recent months. Price dynamics have been permanently higher in Austria than in Germany since mid-2009. In these nine years, prices in Austria have risen by a total of 19 per cent, compared with only 13.5 per cent in Germany. “The higher inflation rate in Austria since 2009 has led to a real appreciation of around 5 per cent compared to Germany,” according to Pudschedl. “The Austrian economy has lost ground in terms of price competitiveness, which is also due to an above-average increase in administered prices, twice as high as in Germany.” There will continue to be an inflation differential between Austria and Germany for the time being. At an average of 2.2 per cent in 2018 and 2.0 per cent in 2019, economists at UniCredit Bank Austria estimate that inflation in Austria will be 2 to 3 tenths of a per cent higher than in Germany.
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;