UniCredit Bank Austria Business Indicator:
Economic recovery moves ever closer thanks to gradual easing of pandemic containment measures and vaccine progress.
- The UniCredit Bank Austria Business Indicator rose noticeably to -0.5 points in February, boosted by the easing of pandemic containment measures in retail and an upturn in global trade.
- At over 1% compared with the previous quarter, the downwards growth trend in Q1 is expected to be noticeably less than the slump seen in Q4 2020.
- The easing of lockdown measures in order to support the beginning of recovery from the winter recession can only be gradually implemented over the coming months due to high numbers of infection.
- A sustained recovery from H2 2021 onwards will enable economic growth of 2.6% in 2021, increasing to 5.7% in 2022.
- The unemployment rate for 2021 is still expected to be 9.5%. A stronger improvement to around 8% is expected by the end of 2022; however, this is still noticeably above the pre-crisis level.
- Temporarily higher inflation of 2% on average in 2021 and 1.9% in 2022 due to higher prices for raw materials and pressure on demand in some service sectors.
Following the major challenges faced at the beginning of 2021 brought about by the pandemic, economic sentiment in Austria has since improved. "The UniCredit Bank Austria Business Indicator rose significantly in February, following the setback seen at the beginning of the year. However, at minus 0.5 points, the current indicator continues to point to a decline in economic output. The Austrian economy is still in recession, which began with the second wave of infections in late autumn 2020. However, the downwards movement has slowed down noticeably", says UniCredit Bank Austria Chief Economist, Stefan Bruckbauer.
The latest economic signals are encouraging. With pandemic containment measures being eased for retail and some personal service providers from the beginning of February, the conditions for the Austrian economy have become more favourable. Positive signs from abroad—particularly from the Asian region—have also strengthened again, as indicated by increasing demand for exports. "Economic sentiment is improving across the board in Austria. Continued optimism in the construction sector is accompanied by increasing support for domestic industry as a result of the upturn in global trade. Some service industries have benefited from the recent easing of pandemic containment measures, and consumer restraint is also declining", says Bruckbauer.
Out of recession one step at a time
The current unfavourable trend in the rate of infections could mean that regional and sector-specific restrictions may need to be temporarily reintroduced. However, increasing vaccination rates and improvements in the economy's ability to adapt to pandemic conditions—via digital distribution channels and the availability of collection or delivery services, for example, along with continued growth in international support—should allow the economic situation to continue to improve. "As we expected at the start of the autumn lockdown, it was not possible to begin the basic easing of measures for some service sectors, in particular the hospitality and accommodation sectors, until the first quarter of 2021. Consequently, this led to a further decline in economic output, which we had anticipated. Estimated at just over 1%, this is expected to be lower than the 2.7% seen in the previous period, the final quarter of 2020", says Bruckbauer.
Rate of recovery continues to be determined by pandemic
Economic life over the coming months will continue to be restricted by the current number of infections; however, increases in the vaccination rate mean that restrictions will be gradually eased, which will have a positive effect on the economy.
"Throughout the second quarter, we will see a noticeable catch-up effect resulting in high growth rates, particularly in retail and other service sectors. Combined with the upturn in the global economy and continued good capacity utilisation in the construction industry, the second quarter should see solid growth in the Austrian economy. However, we do not expect the Austrian economy to begin a sustainable and dynamic recovery until the second half of the year", says Bruckbauer. Even if the pandemic can be brought under further control, any recovery will be marked by uncertainties, meaning that a consistent pace of recovery cannot be assumed.
"Following a significant decline in 2020, we expect a relatively modest 2.6% increase in GDP in 2021. The heavyweight of the economic recovery is not expected until 2022, which could bring economic growth of 5.7%. This would be the strongest increase in around 50 years. However, we expect that the pandemic-related gap compared with 2019 will not close until mid-2022—particularly as recovery in some sectors will be affected by a temporary 'lag' as the result of continued uncertainty", anticipates UniCredit Bank Austria economist, Walter Pudschedl.
Despite the challenging liquidity situation in some sectors, which also makes an increased number of insolvencies likely, it is primarily investments, supported by continued favourable financing conditions, that will determine the pace of recovery. By contrast, consumption will be slower to return pre-crisis levels as a result of upheavals in the labour market, exacerbated by the increased inequality of income distribution. It will take several years for the savings rate—which rose sharply during the pandemic—to fall to a pre-crisis level, as this is mainly dependent on the wealthier sections of the population, whose consumption behaviour is not focussed on covering basic needs.
Continued pressure on labour market
The slower pace of recovery for consumption compared to investment is due, among other things, to the strained situation on the domestic labour market. Supported by arrangements for reduced working hours, the first months of 2021 saw some relief; however, as pandemic containment measures—extended until the end of June—come to an end, the situation will become more challenging.
Firstly, the labour market generally exhibits a delayed reaction to economic recovery and secondly, it will take a long time for demand to reach pre-crisis levels, particularly in sectors that employ a large number of staff. Furthermore, the pandemic has increased pressure on companies to increase productivity by using personnel more efficiently.
“The improving situation on the labour market will face some headwinds from the middle of the year onwards. Following an average unemployment rate of 9.9% in the previous year, we expect only a slight improvement to 9.5% in 2021 as a whole. Not until 2022 do we expect to see the unemployment rate fall more sharply to an average of 8.6%. However, this means that the situation on the labour market will still be much more strained at the end of 2022 than it was before the outbreak of the pandemic", says Pudschedl.
Inflation on the rise after a low start to the year
While inflation in Austria fell below the 1% mark at the beginning of the year, inflation expectations on the markets, on the other hand, have increased. Aside from the prospect of imminent recovery, which could drive up inflation along with demand, this is primarily due to concerns about the negative effects of supportive monetary and fiscal policies.
"The beginning of recovery and increased prices for raw materials are expected to push inflation in Austria above 2.5% over the coming months. This will be accompanied by a temporary shortage of supply in some sectors, such as the hospitality and accommodation sectors. This price pressure will, however, only be temporary. We expect inflation to rise by 2% on average in 2021 and 2022", says Pudschedl.
Given the current underutilisation of the economy—indicated by the fact that the output gap following the pandemic is closing only slowly—we do not expect inflation to get out of hand in the foreseeable future, despite expansionary monetary and fiscal policies. According to UniCredit Bank Austria economists, Austria does not fulfil the conditions needed for a wage-price spiral to drive a sharp rise in inflation. High levels of unemployment will limit wage growth over the coming years.
Enquiries
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at