UniCredit Bank Austria Business Indicator:
Brightening of economic mood temporary; extensive recovery not expected until H2
- UniCredit Bank Austria Business Indicator up at minus 1.1 points in December; indicative only of temporary general improvement in sentiment ahead of introduction of stricter measures again at end of December
- Economic growth in excess of 3% expected in 2021; slow start likely to be followed by rapid recovery towards end of year, beginning over summer months
- Acceleration of recovery expected in 2022, with GDP growth of 5% supported by fiscal and monetary policy measures
- Deterioration on labour market over winter; recovery set to be delayed: By end of 2022, unemployment rate still expected to be around one percentage point above pre-crisis levels
- Despite increases from spring onwards, inflation set to remain moderate in 2021 at 1.5% on average; increase to 1.9% expected in 2022
Following the slump in November, the mood in the Austrian economy brightened somewhat again towards the end of the year. "The pandemic-related turbulence in the Austrian economy continues. The worsening of the economic mood as the second lockdown began was followed by another improvement in the economic climate thanks to the easing of measures ahead of Christmas. The UniCredit Bank Austria Business Indicator rose to minus 1.1 points in December", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. In December, for the first time since mid-2017, all elements of the indicator point to an improvement in the economic situation. "Shortly before the new year began, there was a widespread improvement in the economic climate. However, there has been no change to the split in the Austrian economy, which has been apparent for some time. While the production sector is achieving sustained growth despite the restrictions, large parts of the services sector are caught up in a wave of pandemic measures", says Bruckbauer.
Improved mood in December but more challenges in final quarter as a whole
The upturn among Austrian industrial businesses that began in the summer continued unabated until the end of 2020. Companies within the sector assess the mood as being similar to that seen before the outbreak of the pandemic, buoyed by the revival in global trade. However, the positive signs in the export business, which is currently being driven by a recovery in Asia, are beginning to drop off somewhat.
Momentum in the construction industry, on the other hand, ramped up at the end of the year, benefitting from well filled order books. With a moderate improvement in consumer sentiment and an easing of trading measures in the run-up to Christmas, the economic climate in the services sector has also brightened compared with November, but the prevailing mood is still one of considerable pessimism.
The average value of the UniCredit Bank Austria Business Indicator over the last three months was minus 1.6 points, which is just below the comparable figure for Q3. The indicator thus points to a weakening of the economy towards the end of 2020. "It is our assessment that the Austrian economy slipped into a new recession at the end of 2020, with economic output likely to have slumped by more than 7% across 2020 as a whole. This means that the decline in GDP in 2020, the year of the coronavirus, was around twice as severe as that seen during the financial crisis of 2009", says Bruckbauer.
Austrian economy still in grip of pandemic
The economists at UniCredit Bank Austria are of the opinion that the recent improvement in the economic climate in Austria was only temporary. Given the continuing wave of infections and the recent tightening of lockdown measures following the Christmas holiday period, the Austrian economy began 2021 under difficult conditions that continue to impact the provision of market services in particular, most notably in the accommodation and catering sectors.
The industrial and construction sectors, on the other hand, began the new year with comparatively favourable conditions. A weak, partially downwards economic trend is still expected for most of the winter as a result of the pandemic. Only once the warmer weather arrives and the widespread vaccination of the population is tackled during the coming summer will it be possible to largely remove the restrictive economic measures.
"Following in the wake of the persistently challenging conditions during the winter period, Q2 is expected to bring economic countermovement driven by base and catch-up effects. Only once this happens is fundamental economy recovery expected to bed in, driven by a comprehensive and sustained improvement in economic sentiment in H2 2021. Assuming strong momentum from late summer onwards, economic growth in excess of 3% is in sight for 2021", says UniCredit Bank Austria Economist Walter Pudschedl.
The further course of the recovery will depend not only on the availability of vaccines and the actual normalisation of economic life but also on household spending patterns and companies' willingness to invest. The savings ratio doubled during the pandemic. This indicates, firstly, that there will be continued uncertainty among households and the savings ratio will decline only gradually, in turn meaning very limited recovery in consumption.
Secondly, once the world is released from the clutches of the pandemic it is not beyond the realms of possibility that a "holiday mood" will prevail, triggering a consumption explosion. In the corporate sector, there is a risk that investment could be strongly scaled back as part of a debt-reduction phase designed to chip away at the increased debt built up during the pandemic. Yet on the other hand there is a real need to make up the ground lost when investment was cut back during the pandemic, and to make the most of the favourable financing environment.
"Developments with consumption and investment are the key parameters when it comes to the pace of recovery after the pandemic. We expect consumer and corporate behaviour to adapt very quickly to a normalisation of living conditions. We anticipate sustained strong economic recovery in 2022, with a GDP increase of over 5%", says Pudschedl.
ECB's expansionary course continues to provide good support for growth
While consumer and corporate behaviour during the recovery period will be a risk to the actual pace of the upturn, there are no uncertainties in terms of the expected monetary and fiscal policies. Both the ECB and European governments will continue to offer good support for growth in 2022 with an expansionary course. In Austria, this will take the form firstly of a continuation of the national coronavirus aid package and new economic support measures. Secondly, the Austrian economy will benefit from the positive effects of the reinforced EU financial framework for 2021–2027 and from the EU's "NextGenerationEU" recovery programme, which should take full effect in 2022.
Labour market easing expected to be gradual
Based on estimates from the economists at UniCredit Bank Austria, the output gap caused by the pandemic is not expected to be closed until H2 2022. The labour market will continue to suffer the consequences of the pandemic for some time to come, as there will be a delay to any economic recovery on this market. The situation on the labour market will initially ease from Q2 2021 onwards, though to start with progress will be slow as a result of the third phase of short-time working finishing at the end of March 2021. There is not expected to be any marked improvement in the situation until 2022.
"Following an unemployment rate of 9.9% in 2020, we expect to see a drop in the yearly average to 9.6% in 2021 and 8.7% in 2022. At the end of 2022, the seasonally adjusted unemployment rate is expected to be around 8.3%, which is still well above the pre-crisis level", says Pudschedl. Shortly before the outbreak of the pandemic at the start of 2020, the seasonally adjusted unemployment rate in Austria had fallen to 7.2%.
Inflation with a moderate upwards trend from spring onwards
Inflation will begin to rise in 2021 after starting the year with very moderate figures. One key driver here is the development of the oil price. From March of last year, when the pandemic took hold, inflation was significantly dampened by the slump in the price per barrel to well below EUR 30. From spring onwards, a strong base effect caused by the oil price will see inflation pick up.
Another factor is the valid assumption that the expected economic recovery will lead to higher price dynamics as a result of demand, particularly in various service sectors. One scenario with potential to have a marked impact on domestic inflation in the interim is the opening up of the accommodation and catering sector. "Despite the clear upwards potential of inflation in Austria from the spring of 2021, the average for the year is likely to be just as low as in the previous year, at 1.5%. As the recovery gathers pace, however, inflation is expected to increase to 1.9% in 2022", says Pudschedl.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at