UniCredit Bank Austria economic indicator:
Austria's economy continues to grow, but global environment weighing increasingly on performance

  • UniCredit Bank Austria's economic indicator fell slightly to 3.5 points in October, but remains above the long-term average value.
  • Economic growth still above potential
  • Challenges in the export environment weigh on industrial sentiment in Austria, but domestic sectors in high spirits
  • Forecast GDP growth of 2.7 per cent for 2018
  • Weaker export environment and weakening support from monetary policy dampen growth prospects for 2019 to 1.9 per cent
  • The unemployment rate will continue to fall in 2019, although only a moderate decline from 7.7 to 7.5 per cent is expected.
  • Inflation is expected to average 2 per cent in 2018/19, but lower oil prices will cause a slight downward trend from mid-2019 onwards

Following the steady decline since the beginning of the year, economic sentiment in Austria has now stabilised at a consistently high level. "The stable, high values of our economic indicator show that the domestic economic engine is still running smoothly and at high speed. Despite increasing uncertainties, there are no signs of an economic slump in the coming months," says UniCredit Bank Austria's Chief Economist Stefan Bruckbauer. Although the current UniCredit Bank Austria business indicator is well below the record values at the turn of the year, it is still above the long-term average. Although the peak of the current economic cycle has passed, economic momentum in Austria continues to be above the potential growth estimated by the economists at UniCredit Bank Austria at around 1.7 per cent. "While domestic demand continues to provide strong momentum to the Austrian economy, rising political uncertainty and protectionism in global trade are increasingly affecting the export environment. The sentiment in individual economic sectors is therefore very different: The unbroken peak form of the construction industry and the renewed rise in the services sector are offset by a decline in industry in October," says Bruckbauer.

Economic sentiment suffering from worsening export environment

The declining mood in domestic industry is largely responsible for the slight decline in the UniCredit Bank Austria economic indicator in October. Although Austrian industry remains basically optimistic, business expectations have fallen to their lowest level for more than a year, as the export environment has become noticeably more difficult. International industrial sentiment weighted by trade shares in key export markets has fallen back to the level of December 2016, dampened both by developments in important European partner countries such as Germany, France and Italy and in many emerging markets.

Highest level of growth in the current economic cycle to be achieved in 2018

After the very strong increase in GDP at the beginning of 2018, the economic momentum in Austria was clearly weaker in the next two quarters. On the one hand, this is due to the weakening tailwind from global trade. Although the US protectionist trade policy has so far only resulted in tariffs on a handful of products for Austria, which has hardly had any direct impact on foreign trade, the uncertainty and concern about an escalation of trade tensions between the US and China have begun to affect global demand and have also caused Austria's export momentum to slow down. On the other hand, the domestic economy's weaker performance in the past two quarters is also attributable to temporary production and delivery problems in the international automotive industry relating to new exhaust emission tests, which have had an impact on the domestic supplier industry. For the final quarter of 2018, a slight uptick in growth compared with the two previous quarters is therefore in sight. "By the end of the year, we expect a little more tailwind for the Austrian economy than during the spring and summer. With an increase in GDP of 0.5 per cent compared to the previous quarter, a year-on-year increase of over 2 per cent will be the result. For 2018 as a whole, we expect economic growth of 2.7 per cent," says Bruckbauer. Economic growth in 2018 will thus exceed the recently revised figure of 2.6 per cent from 2017 and will mark the peak of the current economic cycle.

Economic growth below 2 per cent for the first time in four years in 2019

Domestic demand will again strongly support growth in the coming year, albeit somewhat less than in previous years. The high level of growth in employment and real wage increases are providing strong impetus for private consumption. However, the tailwind from global trade will weaken in 2019. Increasing protectionism, sanctions and continuing geopolitical tensions will make business increasingly difficult for domestic exporters. However, the weaker euro and lower oil prices should limit the impact somewhat. "The less favourable export environment and weakening support from monetary policy are damping down the growth prospects for the Austrian economy in 2019. We expect GDP to rise by only 1.9 per cent. However, the decline in annual growth compared with 2018 is overstated by a statistical effect, the so-called statistical overhang. In actual fact, the Austrian economy will maintain its current quarter-on-quarter growth momentum almost unchanged," said Pudschedl.

Unemployment rate to drop to 7.5 per cent in 2019

With the slight weakening of the economy, employment growth, which is expected to be 2.3 per cent year-on-year in 2018 or an increase of around 90,000 jobs, will also be significantly lower in 2019. Weaker employment growth of around 1.4 per cent year-on-year will slow the decline in the unemployment rate in 2019. Following the sharp average reduction from 8.5 to 7.7 per cent in 2018, the unemployment rate will fall only moderately to 7.5 per cent in 2019, especially as there will continue to be a strong increase in the supply of labour. The unemployment rate will thus remain well above the figure of 5.9 per cent from before the financial crisis. In the services sector, in particular, but also in construction, the unemployment rate is still significantly higher than the baseline. By contrast, at just over 3.5 per cent, manufacturing has already returned to the 2008 starting level.

Only slight downward trend in inflation

Despite the slight increase in inflation in the second half of the year due to oil prices, inflation in 2018 will be slightly lower than in the previous year at 2 per cent on average. While the improvement in the labour market has contributed to increasing wage growth, the upward pressure on prices from the demand side will remain manageable. "Inflation will only exceed the 2 per cent mark in the first few months of 2019. We expect average inflation to remain at 2.0 per cent in 2019, once again above the euro zone average," said Pudschedl.


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