UniCredit Bank Austria Business Indicator:
Economic improvement on the horizon after low in April
- The UniCredit Bank Austria Business Indicator rose to -2.2 points in May following April's all-time low
- The gradual easing of lockdown is beginning to mitigate the economic downturn, but GDP in Q2 is set to be around 15 percent lower than in the previous quarter
- Slight boost in economic sentiment among industrial businesses and surprisingly robust consumer mood, set against a backdrop of historically poor sentiment in the service sector
- Recovery in H2, albeit muted by consumer and investor restraint and a lack of stimulus due to limited demand from outside Austria
- GDP forecast remains unchanged: The 9 percent decline in 2020 is likely to be followed by economic growth of 8 percent in 2021
- Gradual improvement on the labour market
- Low oil price and muted demand suppress inflation to an average of 1.3 percent for 2020: The ECB steps things up a gear
Following the historic low in April triggered by the lockdown, the gradual easing of measures to combat the spread of the coronavirus has led to a moderate improvement in economic sentiment in Austria. "The UniCredit Bank Austria Business Indicator has staved off April's all-time low and in May the indicator rose to -2.2 points. The economic mood remains tense, however, indicating that the Austrian economy is only in the early stages of recovery from the lockdown. The economy is currently only performing at about 85 percent of the level seen before the coronavirus outbreak", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.
In April, economic sentiment in Austria deteriorated dramatically across all economic sectors. Driven by the gradual easing of lockdown measures, there have been at least some signs of improvement in all areas in May. "All elements of the UniCredit Bank Austria Business Indicator posted improvements in May, leading to an increase overall. The strongest positive impetus came from the construction sector and, buoyed by a relative easing of the international environment, the industrial sector. By contrast, little has changed in terms of the dramatic effects on the service sector; although the mood among domestic consumers has rallied noticeably and, in historical terms, can be described as relatively robust", says Bruckbauer.
Austria's economy shrank by more than 10 percent year-on-year in H1
The lockdown of the domestic economy that began in mid-March saw economic performance in Austria in Q1 2020 decline by almost 3 percent year-on-year, despite a positive start to the year. The current UniCredit Bank Austria Business Indicator suggests that although the trough was reached in April, the gradual easing of lockdown measures has yet to trigger any noticeable recovery. "Following the decline in GDP in Q1, the slump in the domestic economy as a result of the coronavirus crisis has only really manifested itself in Q2. Economic output is projected to fall by more than 15 percent year-on-year, with H1 showing a decline of more than 10 percent", says Bruckbauer.
Recovery in H2 alongside increasing uncertainty in certain areas
Lower infection rates and an earlier end to the initial lockdown measures have meant that the Austrian economy has not been so severely affected by the coronavirus crisis as other European countries. However, consumer and investor demand is currently showing very little momentum and only with global support will the export-focused Austrian economy return to a growth trajectory. "We expect to see recovery get under way in H2 2020, limiting the decline in GDP in Austria for 2020 as a whole to around 9 percent", says Bruckbauer. The UniCredit Bank Austria economists expect the recovery process to continue in 2021, with economic growth of around 8 percent. However, the downstream risks have increased significantly, as it is becoming increasingly apparent that the high degree of consumer uncertainty could hamper private consumption.
Average unemployment of almost 11 percent expected for 2020
The economic slump saw unemployment rise sharply from mid-March. In April, the unemployment rate reached an all-time high of 12.7 percent. With the gradual easing of lockdown measures, the resumption of work on construction sites and businesses reopening, the peak has now passed and unemployment is falling. "Unemployment will continue to fall over the coming months, but relatively slowly", says UniCredit Bank Austria Economist Walter Pudschedl, adding: "The unemployment rate is expected to remain in double digits in H2. The pace of economic recovery, which is dependent upon demand, will be too slow to generate a quicker reduction. Furthermore, more than one million people are currently working reduced hours."
The average rate of inflation in Austria for the first five months of 2020 was 1.7 percent, with the low crude oil price generating a downwards trend. "We expect the low oil price and the trend of muted demand to further force down prices in Austria. As a result, in the summer inflation could even fall to below 1 percent year-on-year. We currently average inflation for the year at 1.3 percent", says Pudschedl.
More fiscal stimuli needed
In order to counteract the downwards price pressure caused by the growth of the production gap and to maintain favourable financial conditions, the European Central Bank has opted to ramp up and extend the Pandemic Emergency Purchase Programme (PEPP). "The ECB has once again responded quickly to the challenges that lie ahead. The European Commission has introduced a comprehensive package of measures and the governments of some European countries, including Germany, have already presented economic stimulus packages. The time is now also right for Austria to implement additional targeted measures in H2 to boost demand, regardless of budgetary considerations, in order to steer the Austrian economy quickly and sustainably back onto a growth trajectory", says Bruckbauer.
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;