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15.04.2019

UniCredit Bank Austria economic indicator:
Further flattening of growth in Austria - but no crisis in sight

  • The UniCredit Bank Austria Business Indicator drops to 2.4 points in March - the lowest since autumn 2016, despite good domestic performance
  • The export environment continues to deteriorate, but the mood of the domestic economy is showing signs of stabilisation after the slowdown in recent months
  • After the weakest start of the year in three years, economic growth will be noticeably lower than 2018 at 1.4 percent in 2019
  • The end of the US recovery is hampering the global economy and is putting an additional burden on growth prospects for 2020: GDP growth in Austria is expected to rise by 1.3 percent
  • Inflation continues to exceed the euro zone's benchmark by 1.7% and 1.9% in 2019 and 2020 respectively

The economic climate in Austria continued to deteriorate at the end of the first quarter of 2019. "The decline in the UniCredit Bank Austria Business Indicator from the all-time high of 4.6 points at the turn of the year 2017/18 continued in March. At 2.4 points, the current indicator is only reaching as high as its lowest value since autumn 2016," says UniCredit Bank Austria chief economist Stefan Bruckbauer, adding: "However, this means that the indicator continues to exceed its long-term average. Although its momentum is flat, the Austrian economy is still performing above average. This is not to speak of an imminent slump in the economy or even a crisis."

The current indicator emphasizes a continuation of the divergent development of the domestic and foreign economy. "The renewed decline in the UniCredit Bank Austria Business Indicator in March is solely due to the foreign trade components of the domestic economy. However, the economic mood in the various domestic economic sectors stabilised at a high level at the beginning of spring, following the slowdown in 2018," said Bruckbauer.

Global weakness meets domestic optimism
The good condition of the labour market even improved the mood of domestic consumers somewhat at the end of the first quarter 2019, after the uncertainty caused by the more demanding international environment in recent months. This has also stabilised the service sector's optimistic business estimates. In addition, given the full order books, the high mood in the construction sector continues unabated.

However, the burden of the international economy is increasing for the time being. In concrete terms, the decline in the indicator is due to the deterioration of the international export environment and the consequent weakening of optimism in export-oriented industries. The global export sentiment indicator, weighted by Austrian foreign trade, fell to its lowest level since spring 2016 in March, thus also falling below its long-term average for the first time since then. As a result, the mood in domestic industry has also fallen among them. In the first three months of this year, the UniCredit Bank Austria Business Indicator fell to an average of 2.5 points. This figure is consistent with economic growth of around 1.5 percent year-on-year for the first quarter of 2019.

"After cooling in the second half of 2018, the economy has slowed further in the face of existing uncertainties such as Brexit and the burden of the weaker international environment. Domestic demand has kept the Austrian economy on course for growth, although overall with an estimated positive potential of about 1.5 percent year-on-year, it represents the lowest trend in about three years," says UniCredit Bank Austria economist Walter Pudschedl.

In 2019, economic growth in Austria will continue to be largely driven by private consumption. Strong employment growth, increased wage dynamic and slight fiscal stimulus through the introduction of the “Family Bonus Plus” will support consumer growth and will be able to maintain almost the same level as last year. Investment activity, on the other hand, will lose momentum noticeably. The continued high dynamic of construction investment is likely to be offset by a slower pace of expansion in the equipment sector.

However, in view of the continued above-average capacity utilisation, no slump in investment activity is expected in 2019, although lower external demand will weigh heavily. At least some of the existing uncertainties at European level, such as Brexit, should ease from mid-2019. Although economic growth in the second half of the year is expected to be slightly stronger than at the beginning of the year, GDP growth is expected to be significantly lower in 2019 than in the previous year. "In view of the slow economy at the beginning of the year, we now expect a significant decline in economic growth to 1.4 percent for the all of 2019, compared with 2.7 percent in the previous year. Another disruptive factor is added in 2020 with the expected cooling of the US economy, so that the increase in GDP in Austria should be only 1.3 percent," says Pudschedl.

No crisis, only slower pace of growth
"The current weakness of the world economy is the 18th of its kind since 1960 and only one, namely the one in 2008, led to a crisis. The other 17 weaker-than-expected periods ended with a renewed start to the global economy after a few quarters of weaker growth. And this is exactly what we can expect this time," says Bruckbauer, adding: "By 2021 at the latest, we can expect higher growth figures again and then small interest rate increases should also step up." By the end of 2020, UniCredit Bank Austria's economists expect unchanged key interest rates from the European Central Bank - due to the weaker economy and the low inflation outlook. Inflation in the euro area is expected to fall from an average of 1.8 percent in 2018 to just 1.4 percent in 2019. Although inflation in Austria is again expected to be above that in the euro area, at 1.7 percent inflation in 2019 will also be below the previous year's figure of 2.0 percent.

Improvement trend in the labour market is playing out
The slower pace of the economy will have an impact on the development of the labour market in the coming months. The current strong employment momentum, with an annual increase of 2.1 percent in the first quarter of 2019, will slow in the coming months. As a result, the unemployment rate, which was 7.3 percent seasonally adjusted in the first three months, will no longer improve. "At 7.3 percent, the annual average unemployment rate in 2019 will be noticeably below the 7.7 percent of 2018. However, the pace of the decline will be slower than in the previous year and, in view of the weaker growth prospects, no improvement in the unemployment rate is any longer in sight for 2020," said Pudschedl. The slower growth in employment will just be enough to accommodate the rising labour force potential.

Tables and Graphs

Enquiries:              UniCredit Bank Austria Economics & Market Analysis Austria

                                Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;

                                Email: walter.pudschedl@unicreditgroup.at