UniCredit Bank Austria Business Indicator:
Winter lockdowns dampen growth expectations for 2021
- The UniCredit Bank Austria Business Indicator fell to minus 1.6 points in January, thereby exactly matching the average value of the weak fourth quarter of 2020 at the beginning of the year.
- The growth forecast for 2021 reduced to 2.6% after a noticeable recession over the winter, but the pace of recovery is expected to be slightly higher in 2022 than previously forecast, at 5.7%.
- Following a delay, the recovery is starting on the labour market: the unemployment rate is expected to be 9.5% in 2021, with a stronger decline in the annual average to 8.6% not in sight until 2022
- Higher oil prices and pressure on demand in some service sectors are expected to push inflation over 2% at times during the course of this year, but the annual average inflation should remain manageable at 2% this year and 1.9% in 2022.
The Austrian economy started off poorly in 2021 due to the pandemic. "The economic ups and downs resulting from the easing and tightening of measures to prevent the spread of the pandemic have been continuing at the beginning of the year. Following an interim improvement in the previous month, the UniCredit Bank Austria Business Indicator fell to minus 1.6 points in January", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. The performance of the underlying individual components of the indicator clearly shows the ongoing sectoral division of the Austrian economic development as a result of the various lockdown measures. "While pessimism in the services sector rose again at the beginning of the year with the decline in consumer sentiment, the construction industry remains optimistic and, given a slightly improved export environment, the situation in the industry is largely stable", says Bruckbauer.
Decline in sentiment at the beginning of the year only temporary
The comparatively favourable conditions are apparent at the beginning of the year in the construction industry, despite a slight decline in optimism. With order books being well filled, sentiment in the construction sector has actually improved, but confidence remains highest in the civil engineering sector.
The tightening of the lockdown had little impact on the domestic industrial sector in January, as global conditions became more favourable. The export environment improved significantly in terms of sentiment in the international industrial sector sentiment, weighted by the Austrian proportion of trade. The impetus for growth, especially from the Asian region, has ensured that the conditions are the most favourable they have been for two years. While the steel industry, for example, has more of a tailwind behind it, less export-oriented areas of the domestic industrial sector, such as the food and beverage industry, are still feeling the strain.
The tense situation on the labour market once again dampened consumer sentiment at the beginning of the year. Pessimism in the services sector has also increased once again due to regulatory restrictions in various sectors, such as trade, accommodation and catering.
Downturn continues in the first quarter of 2021
The decline of the UniCredit Bank Austria Business Indicator in January was in line with the tightening of the lockdown measures following the Christmas holidays. As a result of the easing in February, it is expected that the downturn in economic sentiment in January was a temporary slump and the economic climate is expected to improve from February, unless measures to curb the number of infections become necessary once more.
Even in the best-case scenario that circumstances surrounding the pandemic stabilise, the loss of the winter tourism season, the restrictions on many personal services and the prolonged closure of restaurants will cause a renewed decline in economic output in the first quarter of 2021.
"The prolonged and in some cases stricter lockdown in Europe and the over-weighted position in tourism led to an above-average slump in the Austrian economy at the end of 2020. Despite the easing of the lockdown from February, we expect the downturn to continue in the first quarter. Following the 4.3% fall at the end of 2020, we expect a further decline in GDP of around 0.5% compared with the previous quarter, which means that Austria will probably have slipped into another technical recession after the spring of 2020", says Bruckbauer.
Sustainable recovery only expected from the second half of 2021
Due to the strong impact the lockdown has had on the performance of the Austrian economy over the winter, the growth prospects for 2021 as a whole are limited despite the fact that the recovery is starting to set in. "After the winter recession - boosted by the warmer season and the continuing vaccination of the population in the second quarter - a turnaround of the economy is to be expected, but this will initially only be driven by catch-up effects. The easing of circumstances surrounding the pandemic is only expected to allow for widespread economic easing and a kick-start to the sustained recovery during the summer. We are currently forecasting economic growth of 2.6% in 2021, which is expected to accelerate to 5.7% in 2022", says UniCredit Bank Austria Economist Walter Pudschedl. The Austrian economy, with its output currently around 9% below the levels before the crisis, is not expected to close the gap again until mid-2022.
Domestic demand driving the recovery
Over the next two years, the upturn will be driven not only by the recovery of international trade, but also by the rebound in domestic demand. After a particularly sharp slump, private consumption in particular will provide momentum, based on the savings volumes accumulated during the lockdowns and the gradual easing of the situation on the labour market.
In view of postponed investments and the continuing favourable financing environment, the willingness to invest is also expected to increase significantly again, although debt reduction in response to the increased liabilities during the pandemic is likely to take precedence in many companies, and rising insolvency figures are also likely to limit investment momentum.
"Domestic demand will provide the momentum for economic recovery over the next two years. Both private consumption and investment activity will be supported to a large extent by an expansionary fiscal policy at national and European level and the ECB's loose monetary policy", says Pudschedl. The European and Austrian economies should receive additional growth support indirectly from the large economic stimulus package planned by the new US government.
Gradual easing on the labour market
The positive impact of the Austrian government's economic stimulus packages, the reinforced EU financial framework for 2021-2027 and the EU's "Next Generation EU" recovery plan will only be seen in the second half of 2021 at the earliest. The positive effects from the beginning of the recovery will also only become apparent on the Austrian labour market after the summer, and a noticeable improvement is not expected until 2022.
"Following an unemployment rate of 9.9% in 2020, we expect to see a drop in the yearly average to 9.5% in 2021 and 8.6% in 2022. In late 2022, the seasonally adjusted unemployment rate is expected to still be over 8%, well above the pre-crisis level", says Pudschedl. Shortly before the outbreak of the pandemic in early 2020, the seasonally adjusted unemployment rate in Austria had been as low as 7.2%.
Inflation on the rise in 2021
"Despite the government's offensive fiscal policy and the continuation of the ECB's expansionary monetary policy stance, the annual average inflation in Austria will remain at a manageable level of around 2% in 2021 and 2022. After low values at the beginning of the year, however, values well above the 2% mark can also be expected in the current year. One reason for this is due to increased demand, which is likely to lead to higher price dynamics in some service sectors, and another is due to the increased oil price", says Pudschedl.
While in 2020, the fall in the price of oil by around a third to an average of EUR 38 per barrel dampened inflation by almost 0.5 percentage points, the expected increase in the price of oil by around 15% to an average of EUR 44 per barrel in 2021 will push the price up slightly from March this year at the latest.
The slight strengthening of the euro and the lower wage pressures during the pandemic are likely to dampen the upwards pressure. Conversely, UniCredit Bank Austria economists are ruling out a strong rise in inflation due to the ECB's expansionary monetary policy course. The growth of broad money has decoupled from the increase in the base money. The money multiplier, i.e. the ratio of broad money to base money, has collapsed in recent years. A sustained rise in inflation can only be expected when factor utilisation rises due to demand. Given the high output gap in the Austrian economy, there is therefore no inflation risk as a result of the ECB's monetary policy course for the time being.
Tables
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at