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06.12.2018

UniCredit Bank Austria Economic Outlook 2019/20:
Economic slowdown continues, economy reaches bottom in 2020 with recession in the US

  • Global economy will slow significantly through 2020
  • Tighter financing conditions and (trade) policy uncertainties will slow the economy
  • US economy faces a mild recession in 2020 after the longest economic upturn in history
  • The eurozone cannot completely escape the negative impact of this, but despite dropping below potential, growth higher than that in the US can be expected in 2020
  • GDP growth in the eurozone to decline from 1.7 percent in 2019 to 1.1 percent in 2020
  • There will be little scope for tightening monetary policy in the eurozone: Only an increase in the key interest rate by the ECB to 0.25 percent in 2020 is to be expected 
  • Austria is countering the global slowdown with solid domestic demand and is outperforming the growth seen in the eurozone: After hitting nearly 2 percent in 2019, economic growth will reach 1.5 percent in 2020

 "The US is currently making its mark on the global economy and will continue to do so in 2019 and 2020," says UniCredit Bank Austria's Chief Economist Stefan Bruckbauer with certainty; he adds: "There are three key reasons for the decisive influence of the US on global economic development: The ongoing tightening of monetary policy, signs of an economic downturn in the US and the increasingly protectionist US economic policy."

Economic and political events in the US set the course

Although the uncertainties caused by the US's change of direction to a protectionist trade policy have so far not been reflected in the real economic data to any significant extent, the atmospheric disturbances have had a negative impact on economic sentiment worldwide. The current purchasing managers' indices show a stagnating order trend in global trade. This will subsequently have an unfavourable effect on the willingness to invest. In combination with the monetary turnaround that has been underway in the US since 2015, with higher interest rates and lower liquidity, the emerging markets in particular are coming under pressure. The Fed will continue to push ahead with its balance sheet contraction and maintain the cycle of interest rate hikes for the time being. By mid-2019, key interest rates are expected to be raised in three further triple steps from 25 basis points to up to 3 percent. Thereafter, however, at the end of the longest economic upturn in US history, the US Federal Reserve could be forced to reverse course in its monetary policy again and the US key interest rate could end the year back at 2.25 percent in 2020.

"The US economy will lose momentum in 2019 and will probably even slide into a recession – albeit mild and brief – by mid-2020. This is due not only to abundant fiscal drivers, but also to weaker investment momentum due to the lower oil price and foreign trade given the stronger US dollar," says Bruckbauer. Economic growth in the US is expected to decline to an annual average of only 0.7 percent in 2020, after reaching 2.4 percent in 2019.

Global economic growth could fall significantly to 2.7 percent in 2020

The consequences can be seen in lower global economic growth, which for the time being will be particularly pronounced in the emerging markets and should bring a decline in global growth from 3.4 percent in 2019 to just 2.7 percent in 2020. Thanks to robust domestic demand, the eurozone will be able to withstand the global downturn at first. Weakening support from the loose monetary policy and the decline in global trade will be partially offset by lower oil prices and the more favourable euro exchange rate.

"2019 will continue to be marked by good economic development in the eurozone, although economic growth will decline from 2 percent in 2018 to 1.7 percent in 2019. However, the decline in annual average growth is mainly due to a statistical overhang, while the pace of growth in the individual quarters will remain largely unchanged from 2018. Only in 2020 will the global slowdown have a noticeable impact on the European economy and only allow economic growth of 1.1 percent in the eurozone," expects Bruckbauer.

Economic slowdown allows almost no movement in interest rates in Europe

As a result of the slowdown in the economic recovery, inflationary pressures in the eurozone are unlikely to build up, especially as the eurozone will not reach its growth potential in 2020 either. Inflation in the eurozone has risen to 2 percent year-on-year in recent months due entirely to the higher oil price. "With the oil price plummeting and, above all, the economic slowdown, which will intensify in 2020 under the influence of (trade) policy uncertainties, the downturn in the US and less favourable financing conditions, the window of opportunity for the European Central Bank to normalise monetary policy could quickly close again," says Bruckbauer, adding: "After the termination of the assets purchase programme at the end of 2018, the ECB's options for interest rate hikes could be limited to a reduction of the deposit rate to zero or a one-off increase of the repo rate to 0.25 percent at the beginning of 2020.”

The phase of low interest rates is therefore likely to continue in Europe for some time to come. Money market interest rates will only slowly come out of the negative zone during 2020, and the rise in long-term capital market interest rates will slow as the economy weakens from mid-2019. In this economic environment, the ECB will therefore once again focus on providing banks with liquidity through special measures. According to the economists at UniCredit Bank Austria, an extension of the existing targeted longer-term financing transactions (TLTRO) is likely.

The interest rate differential between the US and Europe has put pressure on the exchange rate of the euro against the US dollar in 2018. The trend towards a stronger US dollar at 1.08 per euro will not reverse until mid-2019. The economic slowdown in the US and the decreasing interest rate differential will then again provide support for the euro in the direction of 1.20 US dollars per euro at the end of 2020.

Austria’s economy is also clearly past its peak

"Economic growth in Austria rose to 2.7 percent in 2018. Strong global trade has boosted Austrian exports. Together with the domestic economy, which continued to be driven by very strong investment activity and the strongest consumer spending for a decade, this led to the highest GDP increase since the recovery in 2011, immediately after the financial crisis," says UniCredit Bank Austria economist Walter Pudschedl.

However, the economic peak was reached early in 2018. Since spring, the pace of growth has slowed noticeably. The uncertainty caused by the protectionist US trade policy has also had an impact on export sentiment in Austria, which has begun to affect the investment strength. Only private consumption, supported by high employment growth and real wage increases, has shown sustained strength.

Although the current UniCredit Bank Austria economic indicator of 3.2 points is well below the highs seen at the turn of the year 2017/18, it still significantly exceeds the long-term average and signals that the Austrian economy will enter 2019 on a strong note.

Domestic demand will once again be the driving force behind the Austrian economy, even if consumer spending and, above all, investment growth are likely to slow, especially as financing conditions are beginning to change and optimism among companies – with the exception of construction – has already declined. The weakening of the global economy in 2020 – exacerbated by the expected moderate recession in the US – will pose increasing challenges to domestic exports.

"Austria is countering the global slowdown with solid domestic demand, in particular continued strong consumption, and will outperform the growth trend in both the eurozone and Germany in the next two years. After reaching almost 2 percent in 2019, we expect economic growth of 1.5 percent in 2020. This means that for the first time in four years, the increase in GDP will be just below potential again," says Pudschedl. In 2019, Austrian economic output will exceed the 400 billion euro mark for the first time. In the global ranking, Austria is thus likely to advance to 27th place, leaving Iran, with a population of almost 80 million, almost ten times that of Austria, behind.

Private consumption will play a decisive role in 2019/2020 in cushioning the unfavourable external influences on the domestic economy, despite a slight slowdown in momentum following the strongest increase in consumption for more than a decade of 1.9 percent in 2018. The further improvement in the unemployment rate to 7.5 percent and higher wage growth will contribute to this in 2019. In 2020, no further decline in the unemployment rate is expected, with a more moderate increase in employment due to the further increase in the labour force potential.

Inflationary pressure will therefore remain manageable, and the oil price should also take pressure off rising prices in Austria. "After inflation of 2.0 percent in both 2018 and 2019, we expect it to decline to an average of 1.8 percent in 2020. For the twelfth year in succession, inflation will thus be higher than the comparable figure for the eurozone. From a starting point of 2009, inflation will have risen by a total of 6 percentage points above the European average by 2020," says Pudschedl.

There are a number of risks for UniCredit Bank Austria’s economic scenario. In addition to the trade conflict between the US and China, there is also the danger of a hard landing for the Chinese economy after excessive credit expansion. At the European level, political tensions in the run-up to the European elections in various countries could have an additional negative impact on the climate in Europe. Last but not least, the upcoming Brexit, the withdrawal of the United Kingdom from the European Union, at the end of March 2019 will bring economic disadvantages for the United Kingdom, the eurozone and Austria, the extent of which is not yet known.

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Enquiries:              UniCredit Bank Austria Economics & Market Analysis Austria
                               Walter Pudschedl, Tel. +43 (0) 50505 - 41957
                               E-mail: walter.pudschedl@unicreditgroup.at