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UniCredit Bank Austria Business Indicator:
Recession running its course - recovery beckons

  • UniCredit Bank Austria Business Indicator climbs to 1.5 points in March, moving into positive range for first time in a year
  • Spring heralds start of economic turnaround, following further decline in GDP in Q1 2021
  • Global upturn supported by recovery in consumer spending and by investment activity, which will drive the upturn from H2 onwards
  • "A year of recovery from the coronavirus crisis": Economic growth expected to accelerate to 5.7% in 2022, following GDP increase of 2.6% in 2021
  • Inflation set to increase temporarily to more than 2.5% from late summer due to raw material prices and increased demand for certain services; no long-term risk of high inflation
  • Gradual improvement in labour market expected to see unemployment rate drop to an average of 9.2% in 2021 and 8.4% in 2022

Despite a further tightening of lockdown restrictions, the economic mood in Austria improved considerably as spring began. "The UniCredit Bank Austria Business Indicator climbed to 1.5 points in March. This upwards trend was apparent in all sectors of the economy in March, driven by the continued recovery of Austrian industry. The indicator has returned to the positive range for the first time in a year, signalling that the recession that began along with the second wave of infections in late autumn 2020 is now running its course", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.

Further decline in GDP at start of 2021
Looking at the average for Q1, the UniCredit Bank Austria Business Indicator remains narrowly in the negative range despite the current improvements, but is still significantly higher than in Q4 2020. "Economic output in Austria has declined again over the last quarter, but at just over 1% lower than in the previous quarter the decline from January to March is likely to be smaller than that seen at the end of 2020. While international support has seen the industrial economy return to a growth track, many service sectors (such as tourism, retail and personal services) faced even greater challenges in Q1 2021", says Bruckbauer. Recession is likely to have reached its end point as we head into spring, however, economic output is still lagging well behind the previous year. The gap is now smaller than it was back in the winter, however, given that the early effects of the coronavirus were already being felt in Q1 2020.

Recession running its course in spring
Given that lockdown restrictions were tightened in the Eastern Region over Easter, there was a surprisingly robust improvement in economic mood in March. This was due largely to the sustained tailwind being enjoyed by the domestic industrial economy as a result of the global recovery. The upturn in Asia and the recovery in the US have helped economic sentiment within the global industrial economy, weighted by the Austrian share of trade, to achieve its highest level in three years. With weather conditions more favourable and orders maintaining a good level, optimism has once again increased in the construction sector.

"While the upturn in production-based areas continued as expected in March, the mood in the service sector improved surprisingly strongly and made a key contribution to the strong increase in our Business Indicator. The easing of restrictions in the retail and personal services sectors and progress with the vaccination programme have boosted consumer confidence", says Bruckbauer. The gradual improvement in the situation on the labour market has also brightened the economic mood in Austria.

Accelerated recovery expected in H2 following weak start
Despite the extension of lockdown restrictions in the eastern provinces of Austria, the Austrian economy is not expected to remain in recession during Q2 2021. The recovery will be relatively modest initially, given that the lockdown measures in place since the autumn have not been as effective as those in the spring of 2020 and longer-lasting restrictions are expected as a result - all compounded by the fact that the vaccination programme is progressing more slowly than planned.

"The Austrian economy is set to swing towards growth in Q2 2021, driven by the increased consumer spending that will spring forth from the "catch-up effect" in sectors such as tourism and retail, which have been particularly badly affected. Working on the basis that it will be possible to increase the pace of the vaccination roll-out and that it will not be necessary to introduce any major new measures to contain the pandemic, Q2 2021 is set to herald the start of a sustained recovery for the domestic economy that should accelerate sharply in H2", says Bruckbauer. Following a weak start to the year, the economists at UniCredit Bank Austria expect economic growth of 2.6% for 2021 as a whole.

2022: A year of recovery
"We expect GDP to increase significantly in 2022, by almost 6% percent. This would represent the strongest economic growth in around 50 years and would set up 2022 as the year of recovery from the coronavirus crisis", says Bruckbauer. Over the coming year the recovery in Austria will also benefit from significant tailwind from the global economic recovery, with positive momentum for the export-focused industrial economy. The export economy will not be the only driving force behind recovery in 2022; domestic demand is also likely to play a significant role, stemming from the service sectors that were particularly affected by the crisis, such as tourism, hospitality and retail. That said, these sectors will still face some initial challenges, which will limit the speed of the recovery process. While overall economic output in Austria is set to rise above pre-crisis levels during the course of 2022, this benchmark is unlikely to be achieved in many service sectors, including tourism, by the end of 2022.

ECB continues its accommodative monetary policy
This move will see the Austrian economy, like those in most eurozone countries, lose ground compared with the particularly strong pace of recovery in the US, which is likely to result in a GDP increase in excess of 6% as early as this year. Concern about this gulf widening still further is rooted primarily in the specifics of fiscal policy. While the US government is launching a USD 1.9 trillion economic stimulus package, in many European countries (including Austria), fiscal momentum is actually declining on the 2020 performance.

"The ECB will continue to adopt an accommodative monetary policy over the next couple of years. The bank has recently increased securities purchases in a bid to protect European yield curves from the sell-off of US Treasuries and avoid an early tightening of financing conditions. In addition, we expect the PEPP securities purchase programme to be extended beyond March 2022, particularly as there is no risk of a sharp and sustained increase in inflation", says Bruckbauer.

Inflation has been trending upwards since the start of the year, supported by higher energy prices and base effects. Increased raw materials prices and the current pressures in the supply chains are creating price pressure within the industrial economy, coupled with demand that is now particularly strong. By contrast, inflation in the services sector is still being suppressed by reduced demand.

"When the economy restarts and pent-up consumer demand begins to make itself felt, prices in the sectors most affected by the pandemic (such as hospitality and personal services) will rise relatively quickly. However, any increase in prices is likely to be only temporary, as macroeconomic demand is unlikely to outstrip macroeconomic supply for some time following the major economic slump triggered by the pandemic. We expect an average annual inflation of 2.2% in 2021, with highs above the 2.5% mark from late summer onwards. In 2022, we expect inflation to slow again to an average of 2.0% - particularly given that the driving oil-price base effect will likely no longer be relevant", says Bruckbauer.

Slight easing on labour market continues
Seasonally adjusted unemployment fell to an average of 9.3% in Q1, despite the lockdown; the figure for 2020 was 9.9%. "This positive trend for the domestic labour market is likely to continue throughout Q2, underpinned by the continued upturn in the industrial economy and solid progress in the construction sector. The easing of measures to contain the pandemic is likely to give a particular boost to a number of service sectors over the coming months. We are of the opinion that another temporary increase in the unemployment rate could be prevented by extending the reduced working hours schemes beyond mid-2021 exclusively for those sectors that have been particularly badly affected", says Bruckbauer.

Despite recovery bedding in more strongly during H2, the situation on the labour market is unlikely to ease significantly for the time being. The economists at UniCredit Bank Austria expect the unemployment rate to fall to 9.2% in 2021, accelerating to 8.4% in 2022 as recovery gathers pace. That notwithstanding, the situation on the labour market will still be much more strained at the end of 2022 than it was before the coronavirus crisis. Economic output, however, is likely to have outstripped the pre-crisis level. This is due in part to the fact that the recovery will be led by the more capital-intensive industrial economy and in part to the fact the companies are giving greater priority to achieving productivity increases.


UniCredit Bank Austria Economics & Market Analysis Austria
Stefan Bruckbauer, Tel.: +43 (0)5 05 05-41951;
Email: stefan.bruckbauer@unicreditgroup.at