UniCredit Bank Austria Business Indicator
Further Slight Improvement in Economic Momentum
- The UniCredit Bank Austria Business Indicator rose to minus 0.7 points in August, marking a slight improvement compared to July
- Improved sentiment in manufacturing, construction, among consumers, and in exports, but not in the services sector, which continues to suffer from high inflation
- Following a slight decline in the second quarter, the outlook for the second half of the year is more favorable, though ongoing geopolitical tensions are limiting the economic recovery
- Weak economic growth of 0.8 percent for the full year 2026 is likely to result in a slight increase in the unemployment rate to 7.5 percent on an annual average
- The acceleration of GDP growth to 1.2 percent in 2027 should lead to a slight improvement in the labor market
- The lack of de-escalation in the Middle East will lead to higher inflation in 2027 as well, so the forecast rises from 2.5 to 2.8 percent—the ECB is therefore likely to raise interest rates again to 2.75 percent in December
Despite the lack of de-escalation in the Middle East, economic sentiment in Austria improved slightly again in August. “The UniCredit Bank Austria Business Indicator rose to minus 0.7 points in August, once again reaching its highest level since the start of the U.S. attack on Iran and the blockade of the Strait of Hormuz”, says UniCredit Bank Austria Chief Economist Stefan Bruckbauer, adding: “The improvement in sentiment continued—albeit modestly—in manufacturing, construction, among consumers, and in exports. However, rising inflation expectations caused sentiment in the service sector to decline slightly once again.”
Industry, construction, consumers and exports show improved sentiment compared to before the war began
Despite the strain caused by the war in Iran, the economic climate has improved since the beginning of the year in industry, construction, among consumers, and in exports. Only in the service sector was the assessment of the economic situation in August significantly weaker than at the start of the year.
“Sentiment has brightened once again in domestic industry, as well as in construction. The relevant indicators have returned to levels seen in 2023 and are thus significantly higher than in 2025, while consumer sentiment is at least slightly above 2025 levels. Only the service sector remains significantly more pessimistic than last year, weighed down by uncertainty regarding cost trends”, explains Bruckbauer.
Although consumer sentiment remains below average in a long-term comparison and thus falls within the pessimistic range, it nevertheless contributed most significantly to the improvement in the economic indicator in August. At the same time, sentiment in the service sector—although also below average and having even declined slightly in August compared to July—is currently significantly better than it was at the beginning of the summer.
The rise in sentiment in the construction industry compared to July was driven by the ancillary construction sector, which reported a significant improvement. However, sentiment in the construction industry as a whole remains negative across all sub-sectors. In the industrial sector, a further improvement in the order situation and a slight easing of cost pressures contributed to the brighter sentiment, which in August also led to an increase in production and, for the first time, in employment. In addition, the export-oriented economy benefited from a more favorable international environment. The indicator for global industrial sentiment—weighted by Austria’s share of trade—rose slightly again in August, particularly due to the improved trend in Europe.
“Despite the renewed slight improvement, sentiment across all economic sectors remained in negative territory and, in some cases, was well below the long-term average. Furthermore, the assessment of the economic situation in Austria was weaker than in the eurozone for the sixth consecutive month. On a positive note, this gap narrowed in many areas. The largest difference compared to the eurozone is in the construction sector”, explains UniCredit Bank Austria economist Walter Pudschedl.
Recovery under difficult conditions
After the effects of the Iran conflict and one-off factors caused the expected dip in the Austrian economy—a 0.1 percent decline—in the second quarter, current sentiment indicators support expectations of a gradual economic recovery. However, dimmed hopes for a lasting agreement between Iran and the U.S., as well as for the normalization of shipping traffic through the Strait of Hormuz, have once again increased the risks. Above all, the sharp rise in energy prices in Europe—particularly gas prices—poses a risk. Nevertheless, the improved sentiment in the third quarter should have a positive impact on economic development.
As in the first half of the year, consumption—both private and public—is expected to continue to support the economy in the second half of the year. The continued recovery in investment in machinery and equipment, along with a less severe further decline in construction investment, could contribute to the recovery of the Austrian economy. Support will come primarily from foreign trade, though less from exports than from the decline in imports. However, global uncertainty and high energy prices are dampening further improvement in the outlook.
“Despite the lack of easing in the geopolitical situation, the moderate recovery trend already evident at the start of the year should resume. We therefore continue to expect economic growth of 0.8 percent for 2026”, said Pudschedl. The year 2027 is also likely to be initially shaped by the aftermath of the war in Iran. However, a more stable geopolitical environment and the normalization of energy markets should consolidate the recovery through stronger domestic demand. Under these conditions, a slightly stronger GDP growth rate of 1.2 percent is possible.
Labor market remains tight
Despite the weak economy, the Austrian labor market remains robust. The number of job seekers has risen only moderately since the beginning of the year—by about 3,500 people—and even declined in August, supported by noticeable employment growth. In addition, the ongoing shortage of skilled workers and the slow growth in the labor supply are supporting demand for workers. The seasonally adjusted unemployment rate has remained at 7.6 percent since the spring.
With the expected gradual economic recovery, the situation on the labor market should stabilize in the coming months, and a slight decline in the unemployment rate could even begin in the course of 2027. “Following the rise in the unemployment rate to an average of 7.5 percent in 2026, the economic recovery in 2027 should help ease the situation gradually. We expect an annual average unemployment rate of 7.4 percent”, said Pudschedl.
Inflation rises above 3 percent again in august despite VAT cut
Rising fuel prices caused inflation in Austria to climb above 3 percent again in August. According to preliminary estimates, the inflation rate rose to 3.2 percent in August. The fact that the increase was not more pronounced was largely due to the VAT cut on basic foodstuffs. In the first eight months of the year, the average inflation rate was 3.0 percent.
Inflationary pressure will remain high in the coming months. This is indicated by core inflation, which continues to exceed 3 percent. In addition to strong price momentum in the services sector, there are risks of sharper price increases for food due to heat-related crop failures. In addition, energy prices are likely to remain significantly higher than those of the previous year throughout the second half of the year, thereby contributing to inflation, which could even reach 4 percent again toward the end of 2026 or the beginning of 2027.
“We continue to expect an annual average inflation rate of 3.2 percent for Austria in 2026. In the euro area as well, inflation will exceed the European Central Bank’s inflation target”, said Pudschedl. In 2027, inflation in Austria is expected to be higher than previously anticipated, at 2.8 percent, due to high energy prices, particularly for natural gas.
Further tightening of monetary policy likely in December
The situation remains challenging for the European Central Bank. With economic conditions in the first half of the year slightly better than expected, the inflation rate is rising again due to energy prices and could reach 4 percent. Added to this are risks from rising food prices and possible second-round effects of the rise in energy prices.
“Geopolitical risks in the Middle East, uncertainty in the energy markets, and the robust performance of the labor markets suggest that the ECB has not yet completed its tightening cycle. We therefore expect a further 25-basis-point increase in key interest rates at the December meeting, bringing the rate to 2.75 percent”, said Bruckbauer.
Assuming there is no further escalation in the energy and commodity markets, this move is likely to mark the end of the current tightening cycle. However, given the risks of entrenched inflation, a restrictive monetary policy may remain necessary for longer and delay any potential easing toward the end of 2027.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Stefan Bruckbauer, Tel.: +43 (0) 5 05 05-41951;
Email: stefan.bruckbauer@unicreditgroup.at