UniCredit Bank Austria Business Indicator:
Coronavirus halts stabilisation of Austrian economy
- Indicator drops slightly in February 2020, to 1.6 points; however, this figure fails to account for the full impact of the spread of the coronavirus
- Despite almost unabated optimism within the domestic economy in February, exports began showing the first signs of a renewed economic downturn
- Austria’s economic growth curve is set to follow a V-shaped course in the wake of the coronavirus and the containment measures implemented
- UniCredit Bank Austria is reducing its growth forecast for Austria for 2020 from 1.0% to -0.6%. Accordingly, a higher growth rate of 2.0% instead of 1.3% is expected for 2021
- Given this scenario, Austria’s economy is likely to enter a technical recession in H1, followed by a strong recovery in H2 2020
- Sustained issues in Europe beyond Q2 in relation to the virus and further tightening of precautions in other countries would see recovery delayed slightly
- The impact on the labour market is expected to be kept within manageable limits through reduced working hours and liquidity measures for businesses
- Inflation expectations in Austria have been reduced to below 1.5% for 2020 following the drop in oil prices
Austria’s economy began to stabilise at the start of 2020 following a two-year downwards trend driven by the decline in global trade. However, this stabilisation of economic sentiment is accompanied by the first indications of growing uncertainty. “The UniCredit Bank Austria Business Indicator fell slightly to 1.6 points in February, signalling continued moderate growth in the domestic economy. Owing to the fact that additional measures to contain the spread of the coronavirus have been introduced in Europe and in Austria since the data was acquired, the slight decline noted to date is not a reliable indicator for developments in the domestic economy over the coming months”, says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.
As things stand, the UniCredit Bank Austria Business Indicator only suggests increased uncertainty in certain consumer-oriented areas of the Austrian economy and a clear deterioration of the domestic export industry, stemming from the emerging markets in Asia and from China. Consumer sentiment in Austria remained very optimistic until February. The strong domestic labour market, buoyed this winter by a healthy tourism industry and favourable weather conditions for the construction industry, kept the consumer mood high despite a slight downturn.
However, the service sector is now also seeing the first indications of uncertainty. The boom in the construction industry has continued and the mood amongst domestic industrial business has also improved somewhat, albeit coming from the starting point of the particularly difficult situation in the autumn of 2019. “In February, as the export market worsened considerably, Austria’s economy experienced the first noticeable effects of the coronavirus. The partial index of sentiment among international industrial businesses, in line with the Austrian trade figures, has fallen to its worst level since the financial crisis”, says Bruckbauer.
In view of the increase in cases of coronavirus in Europe and the measures introduced in a bid to contain a further spread of the virus, a noticeable economic impact is expected and the economic recovery that began at the start of the year is set to be interrupted. This is due to issues on the supply side, such as disruption to global supply chains owing to production downtimes in China and the subsequent supply issues. In Q2 2020 at least, this will lead to considerably deeper recession for the Austrian industry, with certain key trade partners being particularly badly affected by the current crisis in Europe. Furthermore, with restrictions imposed on everyday activity, demand is expected to fall owing to a period of considerable consumer restraint. The service sector in particular, and the tourism industry most specifically, will be affected disproportionately badly over the coming months. Assuming that the measures introduced to prevent the further spread of the virus are as successful in Austria as they have been in China based on the latest data, the Austrian economy is expected to experience a slight downwards growth trend in Q1 followed by strong decline in economic output, a drop of around 2.5%, in Q2.
If the coronavirus outbreak is contained relatively quickly and the restrictions are lifted, the economy is likely to see significant countermovement in H2 2020, with high growth rates. Accordingly, the Austrian economy is likely to follow a V-shaped course.
While the production downtimes in the industrial sector caused by the supply-side disruption in Q2 are likely to be fully offset in the coming months, the service sector is likely to see only partial recovery. There will be a sustained drop in demand for services such as those in the tourism and leisure industries.
“A significant downturn in industry as a result of the disruption to global supply chains and a lack of consumer demand following restrictions on everyday activity will have a significant impact on the Austrian economy in Q2 2020, leading to a decline in economic output. Significant countermovement is likely in H2, but this will not be sufficient to completely make up the lost ground. As such, we now anticipate a decline of 0.6% in Austria’s GDP for 2020 as a whole, having previously been working on the assumption of 1% growth”, says UniCredit Bank Austria Economist Walter Pudschedl.
Manageable impact on the labour market
The year began with an improvement in the situation on the labour market, driven by favourable weather conditions for the construction industry and a strong tourist season. As a result, the seasonally adjusted unemployment rate for Q1 will be lower than it was at the end of 2019, at an average of 7.1%.
However, by April, the full effects of the coronavirus will be apparent in the Austrian economy and unemployment will increase. The widespread implementation of reduced working hours and liquidity measures for the companies affected is likely to keep the increase at a low level. We also expect the economic situation to settle over the summer, providing relief for the labour market. Despite these mitigating factors, the impact of the fundamentally weaker economy in 2020 will leave its mark, leading to a further increase in the unemployment rate by the end of the year.
“The temporary decline in economic output as a result of the spread of the coronavirus will also be felt on the Austrian labour market. We believe that the negative impact will remain manageable and anticipate an average figure of 7.3% for 2020 as a whole. This would actually result in a slightly lower unemployment rate than in the previous year. However, in contrast to the beginning of the year when the favourable weather conditions had a positive impact, there will be a noticeable increase in the unemployment rate over the course of the year”, says Pudschedl. The UniCredit Bank Austria economists expect the unemployment rate to stabilise at an average of 7.3% in 2021, due to stronger economic growth.
Having seen an increase in inflation at the turn of the year, Austria is now set for a significant decrease in the coming months. One factor that will dampen inflation, in certain service sectors in particular, is the consumer restraint triggered by the restrictions on daily activity.
However, the drop in oil prices as a result of declining demand in the wake of the spread of the coronavirus will be a key contributor, as will the unsuccessful negotiations between OPEC and Russia on production cuts have led to a collapse in oil prices in recent times. The average oil price for the year now looks set to be down by more than 35% on the previous year at an average of USD 40 per barrel, driven by the lower demand that is expected to continue for the time being.
“As a result of the spread of the coronavirus, inflation in Austria over the coming months will drop considerably from the 2% seen at the start of the year to nearer 1% by annual comparison, driven primarily by the low oil price. We anticipate average inflation of 1.2% for 2020 as a whole”, says Pudschedl.
It goes without saying that developments with the spread of the coronavirus have once again dashed hopes of a change to monetary policy; in fact, quite the opposite is true as it now seems likely that the low-interest phase will be extended. In addition, the ECB has introduced new liquidity measures that will help to mitigate the effects of the crisis. The main action is to extend the securities purchase programme and liquidity allotment, but targeted refinancing operations will also help.
“Although the measures implemented by the ECB are very helpful, the strongest impetus during this crisis is likely to come from robust and targeted fiscal policy initiatives. Such initiatives will not help a great deal in the short term, but will lead to a quicker recovery and will minimise lasting damage”, says Bruckbauer.
Considerable forecasting risk
In view of the lack of certainty surrounding the spread of the coronavirus and the intensity of the measures that have been introduced, confidence in current forecasts is low and forecasting risk is trending downwards.
However, estimates suggest that the impact on the Austrian economy is likely to be less severe than it is in many other European countries. This is due in part to the fact that Austria’s reliance on the Chinese economy is at a manageable level, with approximately 2.5% value creation from China. In addition, measures to combat the spread of coronavirus were implemented at a very early stage.
“It is clear that restrictive measures to contain the spread of the virus in Austria will tip the Austrian economy briefly into technical recession, and with economic output dropping by 0.6%, Austria will have its weakest year since 2009. However, this will be offset in 2021 when economic growth of 2% should be possible”, says Bruckbauer, who also believes that, “although we are confronted with a very high forecasting risk, rapid recovery is likely once the emergency measures come to an end, though the pace of recovery and the extent of lasting damage will depend strongly on smart economic policy decision-making.”
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;