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15.05.2020

UniCredit Bank Austria Business Indicator:
After a low point in April, slight economic improvement is expected in May and June

  • In April, the UniCredit Bank Austria Business Indicator fell to a low of minus 3.1 points 
  • The easing of the lockdown allows for a gradual recovery from the cyclical trough in April, but a double-digit slump in economic performance is expected in the second quarter
  • A bounce-back in the economy for the second half of the year will limit the economic decline in Austria to 9 per cent in 2020 as a whole
  • Despite a rise in GDP of 8 per cent in 2021, the Austrian economy is only expected to catch up with the losses caused by the coronavirus pandemic in mid-2022 
  • The reluctance to consume and invest and the lack of demand from abroad, as well as the risk that the pandemic will persist, are preventing a very rapid recovery 
  • The impact on the labour market likely reached its peak in April, but no rapid improvement is expected
  • Inflation is falling below an average of 1% year-on-year in 2020, but is still significantly higher than in the eurozone 

After the significant decline in March, economic sentiment in Austria in April has deteriorated even more as a result of the lockdown. “The UniCredit Bank Austria Business Indicator decreased from 0.6 points to minus 3.1 points in April. This is by far the sharpest decline within one month during the almost thirty-year period in which the indicator has been calculated, reaching the lowest value ever measured. As a result of the lockdown, economic sentiment in Austria is also noticeably worse than it was during the 2009 financial crisis,” says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. 

In March, the fall in economic sentiment was still mainly focused on export-oriented economic sectors, as these were impacted by the disruption to global value chains caused by quarantine measures in China. In April, all sectors of the economy were severely affected by the measures to prevent the spread of coronavirus in Austria. “All components deteriorated in April and the UniCredit Bank Austria Business Indicator continued to fall. The dramatic decline in sentiment in the services sector had the largest impact. Almost 50 per cent of the decline was as a result of this sector,” says Bruckbauer. 

Particularly deep concern in the services sector 
Due to the necessary business closures, sentiment in the services sector fell to the lowest level since the indicator started to be calculated. In contrast to the usual economic fluctuations, the changes in demand was therefore not the main reason for the rapid change in sentiment for service providers. As a result, contrary to what is normally expected, instead of being ahead of the trend in the services sector, consumer sentiment is currently lagging behind somewhat. Austrian consumers were still even optimistic in March. The sentiment only changed when the effects of the lockdown on the labour market became noticeable. However, consumer confidence is still significantly above the record lows reached during the financial crisis. 

Even in construction, the positive sentiment only came to an abrupt end in April when construction sites were forced to close. Considering the full order books and the easing of restrictions that is already underway, the sentiment in construction is only slightly below the long-term average. 

The sentiment in domestic industry has also declined less than during the financial crisis. The weak, optimistic signals at the beginning of the year have now given way to strong uncertainty, as business prospects are being burdened by problems in the domestic market but also by the major deterioration in the export market. The indicator for international industrial sentiment, which is weighted by Austrian’s trade share, has fallen to the lowest calculated value to date due to the serious consequences of the economic restrictions from the measures brought in to combat coronavirus in Europe and the USA. 

“As measured by the sentiment indicators, the service sector is feeling the strongest impact of the coronavirus crisis. The highly export-oriented industry is suffering, albeit slightly less so than the service providers who are experiencing the impact from both the domestic and international lockdowns. Thanks to the initial easing of measures in April and the fact that order books remain well-filled, the construction industry is least affected comparatively,” says Bruckbauer. 

The first half of 2020 is expected to see a decline in GDP of more than 10 per cent compared to the previous year
After a good start to 2020, the lockdown from the middle of March led to a sudden and dramatic slump in the Austrian economy. In these two weeks of March, economic performance fell to around 75 per cent of the normal level, thus triggering a decline in GDP in the first quarter of 2020 of 2.5 per cent compared to the previous quarter. As a result of the lockdown, which was not significantly eased during the month of April, economic performance for the month was also at the low level reached during the last two weeks of March. “The gradual easing of the measures with the phased reopening of some sectors of the economy is expected to result in a slight economic improvement for May and June after the low point in April. However, in the second quarter, overall economic performance will decline by double digits compared to the beginning of the year. In the first half of 2020, the fall in GDP is therefore expected to be slightly more than 10 per cent compared to the previous year,” predicts UniCredit Bank Austria economist Walter Pudschedl. 

Recovery is in sight for the second half of 2020. The expected high growth figures of over 7 per cent in comparison with the previous quarters have to be seen in light of the sharp downturn before. Economic restrictions and social distancing regulations will be in place in Austria and foreign trade will not be fully up to speed due to different security measures in the export markets. “At the end of 2020, economic output will only reach around 95 per cent of the real level before the outbreak of the coronavirus pandemic at the end of last year, in view of an average decline in GDP of around 9 per cent over the year. This means that GDP will be around 4,000 euros less per capita than in 2019”, says Pudschedl. 

UniCredit Bank Austria economists anticipate economic growth of just under 8 per cent for the coming year, provided that a second wave of infection does not occur. As a result, Austrian economic output at the end of 2021 will still be lower than the pre-pandemic level as there will not be an immediate recovery, even if the pandemic does not resurface. 

Despite the easing of safety measures and the opening of businesses with the possibility that all services may be provided once more, there will be a prolonged decline in demand dynamics due to the high level of uncertainty as well as general conditions characterised by social distancing and mandatory face masks. Following the short-term positive catch-up effects, private consumption will only be able to slowly return to its pre-pandemic level due to the tense situation on the job market. 
The same also applies, albeit to a lesser extent, to the willingness of domestic companies to invest. While replacement investments are inevitable, we will initially only see expansion investments in this uncertain and cautious demand environment, which is also likely to lack strong impetus from abroad. As a result, there is an increasing risk that, instead of an optimistic V-shaped recovery scenario – only with a significantly flatter second (upwards) part – it is becoming more likely that the economic trend in the Austrian economy will be U-shaped, even if the number of infections decreases. 

“Alongside the ECB’s continuation of the expansive monetary policy, it is now the time to put full focus on an extensive and cautious national economic stimulus programme, ideally co-ordinated in a European network. In this phase, the immediate stimulation of demand must be prioritised over liquidity and revenue-securing measures for companies,” says Bruckbauer regarding the anticipated backlog in demand when the Austrian economy reboots. “Discussions about the level of deficit must be put aside for the moment, particularly in view of the fact that the prudent channelling of public investments in innovative and climate-friendly sectors alone would resolve an interim rise in debt by increasing the potential growth of the Austrian economy.” 

Expected average unemployment rate of almost 11 per cent for 2020
After a good start to the year, the economic standstill from March meant that unemployment in Austria has risen steeply. In April, the unemployment rate reached an all-time high of 12.8 per cent. It is likely that we have now passed this peak due to the gradual easing of measures, the resumption of activities on construction sites and the reopening of businesses. 

“After the peak of the effect of the coronavirus pandemic on the labour market in April, we expect unemployment to gradually reduce in Austria in the coming months with the progressive easing of the lockdown. However, it is not anticipated that there will be a rapid return to pre-pandemic levels in view of the demand-driven imperfect pace of recovery. Following an average of almost 11 per cent in 2020, we expect an unemployment rate of around 8 per cent in 2021,” says Pudschedl. In view of the 1.2 million people who have been subject to reduced working hours, according to estimations by UniCredit Bank Austria economists, an extension of the reduced working hours arrangements beyond the current entitlement period of two to three months would prove useful and, in the event of a second wave of infection from autumn 2020, necessary, to ensure a continuous decline of Austria’s unemployment rate. 

Inflation nosedive
In the first quarter of 2020, the average inflation rate in Austria was 1.9 per cent, with a downward trend caused by the fall in crude oil prices in particular. The downward trend is expected to continue in the coming months. In addition to the low price of oil, which is reflected in fuel prices, among other things, the cautious development of demand is expected to ensure moderate price dynamics under the 1 per cent mark in Austria in 2020. “We anticipate that last year’s inflation rate of 1.5 per cent will decrease to 0.9 per cent on average for 2020 as a result of the impact of the coronavirus pandemic on commodity prices and demand. With the demand dynamics slightly stronger, inflation is expected to rapidly increase to 1.9 per cent in 2021,” says Pudschedl. As a result, inflation in Austria will again be noticeably higher than the European average. UniCredit Bank Austria economists forecast an inflation rate of between 0.3 and 1.2 per cent for the eurozone. 

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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