UniCredit Bank Austria Business Indicator:
No recovery in sight for Austrian economy before new year

  • UniCredit Bank Austria Business Indicator falls to minus 3.4 points in August 
  • Stagnation to continue until end of 2023 – moderate recovery expected in 2024 thanks to fall in inflation and consequent rise in consumption, but restrictive monetary policy may curb growth
  • Growth forecast for 2023 down to 0.1%, with GDP growth in 2024 also expected to be lower than previously forecast at 0.9% 
  • Unemployment rate to remain at this year's average level of 6.4% in 2024 
  • Inflation continuing to fall, but inflation forecast raised slightly to 7.8% in 2023 and 3.6% in 2024
  • Following recent ECB rate hike of 25 basis points, interest rate ceiling of 4.5% for refinancing rate now likely to have been reached with cycle of interest cuts beginning in mid-2024

"Over the summer, the economic downturn has worsened somewhat with no end in sight any time soon", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer, adding: "The UniCredit Bank Austria Business Indicator Index fell again in August – standing at minus 3.4 points, it has now reached the lowest level during the stagnation period in the domestic economy that started back in July 2022." Meanwhile, pessimism reigns in all economic sectors and production/sales expectations are lower on average than in the previous periods. 

In what is largely an unfavourable overall picture, the first signs of stabilisation are appearing, but in isolated cases. Consumer sentiment has once again worsened due to persistently high inflation and growing concerns about job security. In addition, sentiment in the services sector has worsened again somewhat, partly because the post-pandemic catch-up effects are losing momentum in the tourism sector and the leisure industry, among others. 

However, parts of the production sector are showing signs of bottoming out. In the construction industry, the order situation has stopped deteriorating for the time being, which prevented sentiment from declining in August and could bring an end to the downturn in construction within sight. 

In the domestic goods manufacturing industry, by contrast, the downtrend continued unabated in the face of major concerns about wage trends, energy cost developments and competitiveness. In many sectors, new business is falling noticeably and production is being scaled back. Nevertheless, the indicator for global industrial sentiment weighted by the Austrian share of trade signals a slight improvement in the overall conditions. This index has previously proven to be an important forward indicator for domestic industry, which is heavily dependent on exports. 

"Trends in the export environment of domestic industry and the sentiment in construction could be a first indication that the economy is close to bottoming out. Of course, there is still a great deal of uncertainty at this stage. Even if we have to wait a while longer to see an actual economic turnaround, the downturn in the Austrian economy is at least starting to slow down", says Bruckbauer. 

The current UniCredit Bank Austria Business Indicator clearly demonstrates that recovery in the domestic economy is not to be expected in the coming months, however: Industry is still short of orders and the services sector is likewise lacking restorative momentum due to the loss of purchasing power caused by stubborn inflation. "The economy is largely expected to move sideways until the end of the year, though the risk of a slight recession cannot be ruled out completely", says UniCredit Bank Austria Economist Walter Pudschedl, adding: "Overall, based on the current figures for the first half of the year and the more cautious outlook for the coming months, we have reduced our growth forecast for 2023 from 0.7% to 0.1%." 

The prospects of recovery in the domestic economy around the turn of the year remain good. The decline in inflation will have a positive impact on the development of real income. Combined with the relatively stable situation on the labour market, private consumption is expected to strengthen during the course of 2024. 

"Buoyed by a positive trend in private consumption, we expect the domestic economy to pick up over the coming year. We currently expect economic growth of only 0.9%, as the full effect of the modified financing conditions with higher interest rates will not be felt until 2024 and will have an impact on domestic companies' willingness to invest. Moreover, due to ongoing geopolitical uncertainties, structural problems in key economic areas, including China, and the effects of more restrictive monetary policy worldwide, the stimulus coming from foreign trade in 2024 will be limited", says Pudschedl. 

In the course of 2024, however, economic activity should pick up steadily, as rising income growth in real terms will gradually improve consumer sentiment and give consumption more and more momentum. This, in combination with monetary policy beginning to be eased later in the year, should also have a positive impact on willingness to invest. 

Unemployment rising moderately
The economic slowdown has now belatedly reached the domestic labour market. At a seasonally adjusted rate of 6.6%, unemployment in August was already well above the 6.2% recorded at the beginning of the year. In view of the continuing stagnation, the unemployment rate in Austria will continue to rise slightly. "Due to the more favourable development at the beginning of the year, the average unemployment rate in 2023 is expected – despite the continued increase in the coming months – to be only marginally higher than in the previous year, at 6.4%. With the economy picking up slightly in the course of 2024, the situation on the labour market should ease again somewhat. However, we expect the average unemployment rate for the year to stabilise at 6.4% at best", says Pudschedl. 

The relatively minor impact of the weak economy on the domestic job market is linked to structural changes in the labour supply. For example, part-time working continues to be popular, which is leading to a reduction in the average working hours per employee in Austria. Despite the weak economic development, the number of employees has increased and reduced the pressure on the labour market, while the volume of working hours in the Austrian economy is staying largely the same", says Pudschedl. In addition, growth of the labour supply is slowing down due to demographic developments, such as the baby boomers of the 1960s retiring from the workforce. The previously strong influx of workers from other EU countries is likely to decrease too. 

Inflation decline to enable turnaround in interest rates in mid-2024 
The fall in inflation from more than 11% at the beginning of the year to 7.5% in August is set to continue accelerating in autumn. Inflation is expected to go down to below 5% at the end of the year. "Following the very slow and volatile decline in inflation so far, we now expect slightly higher average inflation of 7.8% for 2023 as a whole. With the boost from energy price trends and high wage dynamics with real growth coming to an end, inflation will continue to decline in 2024, but once again slowly. With an average of 3.6%, we expect inflation to remain well above the ECB's target", says Pudschedl. 

"Following the ECB's announcement of a further 25-basis-point hike in key interest rates at yesterday's meeting and its comment that the interest rate level is sufficiently restrictive, we believe that the interest rate ceiling has probably been reached in the eurozone. As inflation continues to ease towards the ECB's medium-term target of 2%, a cycle of interest rate cuts can be expected to begin in the second half of 2024. By the end of 2024, we expect key interest rates to decrease by a total of 75 basis points", concludes Bruckbauer. 

UniCredit Bank Austria Economics & Market Analysis Austria 
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at