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15.03.2019

UniCredit Bank Austria business indicator:
Ongoing uncertainties dampen Austria’s growth prospects

  • The economic mood continues to worsen: The UniCredit Bank Austria Business Indicator sank to 2.5 points in February 
  • The consequences of the ongoing downturn in the export environment are being softened by the optimistic domestic mood
  • The unemployment rate will drop to 7.3% in 2019, although the favourable trend will end in the middle of the year 
  • At 1.8% and 1.9% in 2019 and 2020 respectively, inflation will continue to surpass the comparable rate in the eurozone
  • Despite this, Austria’s economy continues to enjoy success in exports
  • Extension of the ECB’s liquidity measures through long-term loans; interest rate increases not appropriate in this environment for a long period

The economic mood continues to worsen following its all-time high at the end of 2017. “In February 2019, the UniCredit Bank Austria Business Indicator dropped to 2.5 points. Although the pace of decline has somewhat slowed recently, the indicator has now reached its lowest point in two-and-a-half years”, says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. 

Whilst the challenges in exports significantly worsened once again, the continuing domestic optimism curbed the drop of the UniCredit Bank Austria Business Indicator. The sharp decline in the sub-indicator for the international export environment weighted for the Austrian proportion of trade once again severely dampened the mood in the domestic industry. In contrast, optimism in construction even increased, whereas the mood in the service sector has barely changed, particularly since domestic consumers have even become slightly more confident due to the ongoing favourable trend in the labour market and the higher wage momentum in February. 

Lower growth prospects for 2019/20
Since the second half of 2018, the economic engine has been ticking over slowly. The ongoing decline in the UniCredit Bank Austria Business Indicator and the actual economic data currently available do not lead to the expectation that the trend will change at the beginning of 2019. The current uncertainties surrounding the impending Brexit, the changes in global trade brought about by US policy, and the consequences of the new emission test cycle for the automotive industry continue to damage exports. 

“Based on domestic demand, the Austrian economy will be able to continue its economic growth at the start of 2019. However, for the first time in two-and-a-half years, GDP growth in a single quarter will be less than 2% year-on-year”, believes Bruckbauer. Even if the current uncertainties are at least partially assuaged by the middle of 2019, GDP growth in 2019 will still be significantly below that of the previous year. “In 2019, we expect a decline in economic growth to at least 1.6% following the strong 2.7% of the previous year. In 2020, there will be two more hindering factors – the continued slowing down of momentum in China, and an anticipated marked weakening of the US economy – opening the door to a further decline in economic momentum”, says Bruckbauer. “In any case, above all, the odds that growth will be weaker than we expect in 2019 are higher than the odds of a favourable surprise”, he adds. 

Favourable trend on the labour market will come to an end in 2019
The weaker economy will end the positive development of the Austrian labour market over the course of 2019 according to the assessment of UniCredit Bank Austria’s economists. “From mid-2019, unemployment in Austria is expected to stop falling. Thanks to the strong start provided by weather conditions at the start of the year, the average annual unemployment rate in 2019 will nevertheless reach 7.3%, once again a level noticeably below that of the previous year. For 2020, however, no further improvement is to be expected”, says UniCredit Bank Austria economist Walter Pudschedl. 

Higher inflation than in the eurozone has until now not led to any drop of competitiveness 
In this economic environment, inflation in Austria will be below the level of 2% in both 2019 and 2020. “The lower price of oil will curb inflation. In addition, upward price pressure caused by demand will remain manageable in 2019/20. However, growth in wage momentum and strong domestic demand will boost price rises, particularly in the service sector, to the extent that inflation, at 1.8% in 2019 and 1.9% in 2020, will again be noticeably above the comparable rate in the eurozone”, expects Pudschedl. 

Since 2008, there has been a cumulative inflation upswing of around 5.5% compared to the eurozone. There are, however, at present no indications of declining competitiveness in Austrian export trade as a result of the comparably higher inflation. The Austrian market share (goods exports as a percentage of goods imports) has remained largely unchanged in the eurozone since 2008 at 4.4%. Net exports (goods exports minus goods imports) in relation to economic performance does indeed represent a liability. The balance, however, has even improved by one percentage point since 2008. 

Fiscal stimuli at the right time
By reducing unemployment figures in low-paid earners in mid-2018 and introducing the Family Bonus Plus at the beginning of 2019, the Austrian government has introduced measures to strengthen domestic demand in order to counteract the weakening effects on growth caused by export trade. 

If the economy continues to remain weak in the eurozone, fiscal measures at the European level may become necessary. However, because of the upcoming European Parliament elections, the odds of a sudden implementation of coordinated economic stimuli are limited. “However, in order to restore a more favourable growth environment for the European economy, there is, in our opinion, less of an urgent need for fiscal economic stimuli than for measures to overcome the current uncertainties surrounding Brexit and the protectionist US trading policy”, says Pudschedl. In particular, a solution must be found quickly in terms of the potential US tariffs on the automotive industry. 

No normalisation of monetary policy in sight
Given the significant slow-down of economic growth and the declining inflation expectations in the eurozone, no further normalisation to the current monetary policy of the European Central Bank is expected for the time being following the end of its asset purchase programme at the end of 2018. 

“In the current economic climate, the odds of increases to key interest rates seem remote and additionally, would make no sense. We do not expect any changes to the current interest rates until the end of 2020”, says Bruckbauer and adds, “The recently announced new series of quarterly Targeted Long-Term Refinancing Operations (TLTROs) will contribute to refinancing expiring long-term loans, and thus to limiting the potential negative effects on borrowing dynamics in the eurozone, although the two-year period from September 2019 to March 2021 may be rather short.” The expiring long-term loans from the years 2016 and 2017 had a duration of more than four years. 

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