UniCredit Bank Austria economic indicator:
Domestic business continues to drive Austrian economy, albeit with an increasing degree of uncertainty in the export market

  • UniCredit Bank Austria economic indicator signals strong economic growth for autumn 2018 with an increase to 3.6 points in September
  • Optimism remains high in the construction and service sectors, but industry is feeling the effects of rising global uncertainty
  • Weaker global business to slow economic growth in Austria to 2.0 per cent in 2019, from 2.8 per cent in 2018
  • Moderate decline in unemployment rate to 7.6 per cent in 2019
  • Inflation expected to remain above 2 per cent until mid-2019

In the early autumn, the economic mood in Austria has picked up compared to what it was in the previous month. This is the first time that this has happened this year. “The UniCredit Bank Austria economic indicator improved to 3.6 points in September. The economic mood in Austria has therefore improved slightly for the first time since the decline that started in early 2018 and the stabilisation that followed in the summer. The domestic economy should continue to grow at an above-average rate in the coming months, although the momentum is now weaker than at the beginning of the year,” says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. However, the economic trend across the various economic sectors is no longer synchronous. “Although economic growth remains on a broad footing, domestic demand continues to provide the economic tailwind, while support from the international economy is declining. The uncertainty caused by protectionist measures in global trade is reflected in the export business,” says Bruckbauer.

The outlook for the Austrian economy remains positive
The slight increase in UniCredit Bank Austria’s economic indicator in September is due solely to the further improvement in outlook in the domestically-oriented business segments. “The easing of the situation on the labour market has boosted consumers and had a positive effect on the outlook for service providers. Added to this are the record sentiment highs in the construction sector. By contrast, the weaker export environment is depressing the mood in the strongly export-oriented industrial sector,” says UniCredit Bank Austria economist Walter Pudschedl. The international component used in the overall indicator to estimate demand in the most important sales markets of the domestic export economy continued its downward trend in September and is now at its lowest level since spring 2017. Nevertheless, by long-term comparison, the international economy still offers an above-average tailwind for Austria’s economy.

Export environment biggest growth risk for 2019
Following the slowdown in economic growth in the spring, UniCredit Bank Austria’s economic indicator for the third quarter of 2018 signals a stabilisation of growth momentum and an increase in GDP of around 2.5 per cent year-on-year. Supported by the strong increase in employment and higher wage growth, private consumption should continue to be a stable pillar of the Austrian economy in the coming months. In addition, capital investments will continue to make a strong contribution to economic growth, although support is likely to decline in 2019. Despite above-average capacity utilisation, demand for expansionary investments appears to be declining, especially as the export environment appears to be weakening.

“After an increase in GDP of 2.8 per cent in 2018, we expect economic growth to slow to 2.0 per cent in 2019. In our opinion, the decisive factor for the actual level of the economic slowdown in the coming year will be the strength of foreign trade,” says Pudschedl. In view of the existing risks for global trade, there seems to be little doubt that there will be a weakening of global economic support for the domestic economy. We should mention in this context the forthcoming Brexit, the protectionist US trade policy and the conflict with China, the weakening drivers from the US economy with the end of the positive effects of the tax reform and the growth risks for emerging markets, which are primarily dependent on external financing, triggered by the interest rate hikes in the US.

Unemployment rate declines
The economic upturn will enable very strong employment growth of an average of 2.4 per cent or almost 90,000 people in 2018 compared to the previous year. The annual average unemployment rate of 7.7 per cent will therefore be noticeably lower than the 8.5 per cent in 2017. The decline in the unemployment rate will not be greater due mainly to the sustained strong increase in the supply of labour, primarily from within the EU. In 2018, the labour supply will be on average 57,000 persons or 1.4 per cent higher than in the previous year. Despite the high employment growth, the number of job seekers will therefore fall by fewer than 30,000, taking into account the slight decline in the number of people in training. The annual increase in the labour supply in Austria of around 1.4 per cent, or slightly more than 50,000 persons, has therefore remained roughly constant since 2011.

Even on the assumption that the peak is now likely to have been passed, the existing high wage differential means that significant growth can also be expected in the coming years. “The decisive factor for the development of the unemployment rate in Austria is the strength of the increase in the labour supply. At 1.3 per cent, employment growth in 2019 is expected to be significantly lower due to the economic situation. We expect the unemployment rate to fall only moderately to an annual average of 7.6 per cent in 2019,” said Pudschedl.

Normalisation of monetary policy has arrived
Despite the calmer economic trend, inflation is currently showing a slight upward trend. Since the beginning of the second half of the year, inflation in Austria has risen back above 2 per cent year-on-year. However, the increase compared to the first half of the year is primarily a result of the higher oil price. In September, the average price of oil was 68 euros per barrel, around 45 per cent higher than in the previous year. On the other hand, the slightly lower core inflation shows that the upward pressure on prices in the domestic economy is low. Core inflation (excluding energy and food) in Austria has been stable at below 2 per cent year-on-year since May.

Inflation in Austria is somewhat higher than the European average, but the trend is largely identical, driven by external factors. While overall inflation in the eurozone has now risen to over 2 per cent, core inflation is quite stable at just over 1 per cent. In the coming months, however, increasing inflationary pressure beyond the oil price can be expected both in Austria and in the eurozone as a whole. While the price-increasing influence of the oil price has presumably already passed its peak, the positive development on the labour market will ensure a further increase in wage growth. This will therefore hardly have an effect on overall inflation, but will certainly have an impact on core inflation. “In Austria, we expect inflation rates of well over 2 per cent by mid-2019 and then a slight easing due to the oil price. After an average of 2.1 per cent in 2018, inflation should be only slightly lower in 2019 at 2.0 per cent,” says Bruckbauer.

Despite a somewhat weaker economic trend, the European Central Bank is therefore able to continue along the path of monetary policy normalisation. Since October, the ECB has halved the volume of the securities purchase programme to EUR 15 billion per month and will terminate the programme at the end of the year. “We expect the ECB to take its first interest rate step by raising the deposit rate by 20 basis points in September 2019. The first increase in the key interest rate is not expected until 2020, when the zero-interest rate phase in Europe will come to an end after around four years,” said Bruckbauer.


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