UniCredit Bank Austria Industry
Overview Economy weak but stable with mixed industry trends
- Economic sentiment improved in all sectors of the economy, but remains below the long-term average
- Industry surprised with growth in the first half of the year, but declining competitiveness and US tariffs will dampen momentum
- Nevertheless, industrial production should be able to grow by around 1.5 per cent in real terms in 2025, following two years of declines
- Stagnation in construction is likely to continue, weighed down by the ongoing slump in building construction
- The service sector will remain the growth driver of the domestic economy in the second half of the year, with a good chance of gaining some momentum
- Trade was up slightly in the first half of the year, weighed down by negative results in wholesale. Adjusted for price changes, retail and motor vehicle sales will also grow only slightly this year
After a slight increase in GDP of 0.1 per cent compared with the previous quarter at the beginning of the year, the weak upward trend continued in the second quarter. Economic output rose again by 0.1 per cent compared with the previous quarter. However, year-on-year, GDP in the first half of 2025 was 0.2 per cent below the previous year's figure.
“The slight economic growth since the beginning of the year is mainly due to the upturn in industry, which, however, slowed sharply in the spring. While the decline in value added in construction continued, the service sector gained momentum and became the driving force in the further course of the year. However, the picture was very mixed, with value added in financial services, real estate services and other economic services increasing, while consumer-related areas such as retail and tourism were unable to expand”, says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.
The majority of domestic companies started the third quarter of 2025 with pessimistic expectations, albeit improved compared to the second quarter. The industry climate is currently gloomy or cooling in most sectors. There are only isolated rays of hope, such as in food production, electrical engineering and metal goods manufacturing, although the latter do not appear to be sustainable due to US tariff policy.
Current survey results continue to point to only modest economic growth in the coming months, although the assessment of the situation in all sectors of the economy improved at the beginning of the third quarter. The service sector in particular is experiencing some tailwinds, supported by lower interest rates and increased purchasing power. However, the government's austerity measures and the continuing deterioration of the labour market are dampening the outlook for the coming months.
The situation in the construction industry also improved slightly at the beginning of the second half of the year. However, despite partial stabilisation trends, the economic outlook for construction remains very challenging for the coming months, especially for building construction. The customs agreement with the US has at least eased the uncertainty in domestic industry, and the moderate recovery trends in industrial activity have strengthened somewhat, but the risks in exports continue to dampen the outlook.
“We expect the service sector to keep the Austrian economy on track for growth. The industrial economy is likely to remain stable in the coming months. However, hopes for a more favourable economic trend in construction are unlikely to be fulfilled for the time being due to the challenges in building construction”, says UniCredit Bank Austria economist Walter Pudschedl, adding: “The economy in Austria is currently weak, but stable. The weak GDP growth observed since the beginning of the year is likely to continue relatively unchanged in the second half of the year. This means that, after two years of decline, the Austrian economy could see a minimal increase in GDP of 0.1 per cent.
To determine the industry climate indicator, production and sales trends up to the first half of 2025 are compared with the results of the economic survey conducted in July 2025.
Industry improves, but high risks due to US tariff policy
Following a decline in production of almost 5 per cent in 2024, real industrial production rose by 2.6 per cent (manufacture of goods) in the first half of the year. While some consumer-related sectors such as food production and, above all, the pharmaceutical industry were able to continue their strong growth, the turnaround was mainly due to an improvement in some capital goods industries and construction-related sectors such as the wood industry, the chemical industry and metal production. Motor vehicle manufacturing also returned to growth, but was unable to maintain the positive trend after a good start to the year. Metal goods manufacturing and mechanical engineering remain under pressure, but there were tentative signs of improvement in the middle of the year.
“In view of the challenges ahead due to reduced competitiveness, a still weak investment climate and US tariff policy, production expectations remain below the long-term average. However, they have continued to improve despite the unfavourable order situation at the beginning of the third quarter. The slight tailwind for domestic industry is not expected to gain momentum in the coming months, but it should not come to a complete halt either. Due to the risks associated with exports, sectors that are less sensitive to economic cycles, such as food production, are at an advantage, while US tariffs are likely to hit the pharmaceutical industry and automotive manufacturing, among others”, said Pudschedl.
The crisis in (building) construction continues
Following the decline in construction output in 2024 in both building construction and civil engineering, the two sectors developed very differently in the first half of 2025. The stabilisation trends in the building construction sector observed around the turn of the year did not continue in the second quarter. Output in building construction fell by more than 10 per cent year-on-year (in real terms, adjusted for working days).
In a strong counter-movement to last year's slump, production in civil engineering rose by almost 15 per cent in the first half of the year, with the pace of growth gradually slowing after a particularly good start to the year.
The economy also weakened in specialized construction activities over the course of the year, weighed down by the reduction in government subsidies. In the first half of the year, production stagnated year-on-year. Overall, construction output in the first half of the year showed only a minimal decline of 0.3 per cent in real terms compared with the previous year.
Around a quarter of companies cite a lack of orders as the biggest obstacle to production in the construction sector, although this trend has been declining for several months. As a result, the order situation in the construction sector has stabilised at a low level, but remains below the long-term average in all sub-sectors, even in the significantly improved civil engineering sector.
“The crisis in building construction is entering a new phase. The only glimmer of hope is the return of more favourable financing conditions, which should support non-residential construction in particular in the second half of the year. The high momentum in civil engineering seen to date is unlikely to be maintained in view of tight public budgets. The consolidation of the federal state budget will also hit the spezialized construction activitities in the coming months, following the discontinuation of various support measures, such as the repair bonus and the boiler replacement scheme, at least temporarily”, says Pudschedl, adding: "The outlook for the construction industry in the second half of the year is very subdued. Although the economic low point is likely to have been reached, there are still no signs of growth momentum across all sub-sectors. At least a consolidation of the stabilisation trends is in sight.”
Slightly more tailwind for the service sector
After weakening in the first quarter of 2025, the service sector improved slightly in the second quarter, but remained significantly burdened by inflation rising above the 3 per cent mark, which slowed the ongoing increase in real purchasing power and weighed on consumer confidence. In addition, consumer uncertainty increased as a result of the continuing deterioration in the labour market and economic concerns related to US tariff policy.
Supported by stabilisation in industry and strong demand in tourism, turnover in transport and storage increased in the second quarter. In the business services sector, the majority of industries have seen real declines in turnover so far this year. While ICT services expanded in real terms, there were noticeable declines in turnover in advertising, construction-related and technical services, cleaning services and, above all, in the provision of temporary staff.
In the accommodation and food services sector, turnover from January to May 2025 was up by an average of 2.3 per cent on the previous year thanks to good capacity utilisation and a slight increase in overnight stays. However, due to high inflation, this represents a real decline in turnover of 2 per cent on average, slightly more in accommodation than in food services.
“The business climate in the service sector improved steadily during the second quarter. Both the current mood and demand expectations for the next three months are currently at their highest levels this year. The business situation and outlook are still assessed as less favourable than the long-term average, but for the first time in a long time they are better than in the eurozone”, says Pudschedl, adding: “The tailwind for the service economy has picked up again slightly, but remains modest given high inflation, tensions on the labour market and budget cuts. The service sector should remain on track for growth in the second half of the year, probably at a slightly faster pace than in recent months.”
Low sales growth in retail likely to remain modest
After a strong start to 2025, retail lost momentum significantly in the spring, but began to stabilise again in the course of the second quarter. In the first five months, sales rose by an average of almost 2 per cent in nominal terms, which corresponded to an increase of 0.5 per cent in real terms.
The outlook for all sectors of the retail trade for the second half of the year is very cautious. While significant sales growth appears possible in the wholesale trade in consumer goods and in the wholesale trade in data processing equipment, further losses are likely, particularly in the industry- and construction-related sectors.
Despite rising purchasing power, mixed developments are also to be expected in the retail sector in the coming months. While food retail, clothing retail and trade in data processing equipment and consumer electronics are likely to continue to perform above average, sports retailers and retailers of construction and DIY supplies, among others, will remain under pressure.
At the start of the second half of the year, companies in the automotive trade, including repair shops, assessed their business prospects as largely stable, but demand expectations for the coming months have deteriorated significantly. The existing challenges also point to a more cautious sales trend in the medium term, weighed down by the continuing subdued economic outlook and the tense situation on the labour market.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at