UniCredit Bank Austria Business Indicator
Autumn sees economy continue to decline
- UniCredit Bank Austria Business Indicator falls to minus 4.0 points in September, its lowest level since first coronavirus pandemic lockdown
- Weak demand in manufacturing sector spreading to services sector
- After weak year end, declining inflation should kick-start moderate recovery in 2024 and enable slight economic growth of 0.9%
- Negative impact of economic slowdown on labour market remains limited: Unemployment rate expected to rise only slightly in 2023/24 to average of 6.4%
- Inflation to fall from average of 7.8% in 2023 to forecast of 3.6% in 2024
- No further interest rate hikes expected in eurozone. Declining inflation could allow for cycle of interest rate cuts from mid-2024
- Contained conflict in Middle East unlikely to pose much risk to decline in inflation and interest rate outlook
Economic activity in Austria continued to deteriorate at the start of autumn. "September saw the UniCredit Bank Austria Business Indicator continue its downward trend, which began just after the year started. At minus 4.0 points, the latest indicator now signals that economic conditions were last assessed less favourably only during the first coronavirus pandemic lockdown", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer, adding: "The weakness in demand that has been weighing on domestic production and construction for months has already been fully passed to the services sector, which is now characterised by a real drop in sales in most lines of business."
Inflation slowing down purchasing power
Bolstered by the savings accumulated during the pandemic and fiscal support to compensate inflation, the demand for services has counteracted the slowdown in the manufacturing sector in recent months – but the loss of purchasing power due to high inflation is now exerting its full impact on demand in the services sector. "In September, the worsening sentiment in the services sector had the greatest impact on the renewed decline of the UniCredit Bank Austria Business Indicator, which was clearly burdened by the further deterioration in consumer sentiment. The downward trend in domestic industry also continued, although the export environment appears to be slowly improving", says Bruckbauer.
In domestic industry, concerns about wage trends, energy cost developments and competitiveness are weighing on sentiment. Nevertheless, the indicator for global industrial sentiment weighted by the Austrian share of trade signals a slight improvement in the overall conditions for the second consecutive month. This index has previously proven to be an important forward indicator for domestic industry, which is heavily dependent on exports. While the situation in Europe and large parts of Asia remains challenging for the most part, tensions in industry in the US have eased somewhat. Together with sentiment in the construction sector brightening once again, this could signal that the economic situation is beginning to stabilise.
Mild recession?
"Following the deterioration in economic performance in the second quarter, the downtrend in the UniCredit Bank Austria Business Indicator in recent months indicates that this decline will continue into the third quarter. This means it has now become very likely that the Austrian economy has been in a mild recession since spring", says UniCredit Bank Austria Economist Walter Pudschedl. The latest economic data and sentiment indicators show that there is a lack of further decisive growth momentum for the time being. Instead of a much longed-for recovery setting in, weak economic development can be expected to continue at least until the end of 2023. However, there are no signs of a slump in the Austrian economy.
"We remain optimistic that improved framework conditions driven by a decline in inflation will have a positive impact on economic momentum in 2024. However, catch-up effects tapering off, loan cost increasing and the high level of uncertainty due to existing geopolitical challenges will make but a delayed contribution to sentiment in the domestic economy changing", says Pudschedl, adding: "This means that the pace of recovery in 2024 remains manageable. We anticipate moderate economic growth of 0.9%."
Unemployment to rise at least until spring
Owing to the ongoing economic slowdown, the situation on the Austrian labour market will deteriorate further into spring 2024. The upturn in employment is expected to slow down further and, in turn, the number of job seekers is expected to increase. Due to the increase in the labour supply being smaller than in previous years, however, the unemployment rate is unlikely to rise much further. The labour market has proved to be very resilient to the economic cycle, as there is still a backlog of vacancies to fill in some cases due to the strong recovery phase as a direct result of the pandemic. Moreover, the tight labour market means that efforts are being made to retain qualified workers, particularly in industry.
Despite the pace of recovery remaining only moderate, the upward trend in unemployment is expected to reverse again in the course of 2024. While employment growth is even expected to be slightly lower than in 2023 at less than 1%, the situation on the labour market will be boosted by demographic effects such as the baby boomer generation moving towards retirement age. "Following an average unemployment rate of 6.4% for 2023 – which is only slightly higher than the previous year's figure despite stagnation in the Austrian economy – we are once again expecting an average unemployment rate of this level in 2024 after a less favourable start to the year", says Pudschedl.
Inflation continues to fall despite risk of headwinds from Middle East
Crucial to improving the economic outlook in 2024 is the continued decline in inflation, which in Austria has already fallen from over 11% at the beginning of the year to around 6% in September. Inflation will continue to fall in the coming months. The lower wholesale prices of gas and electricity being passed on to consumers in combination with food and industrial goods prices falling should exert downward pressure. In view of automatic indexation and rising wage costs, however, the rise in prices for services is likely to be slow to recede – especially since demand ought not to experience any slumps as a result of imminent real wage increases.
"We expect inflation to continue to fall to below 5% at the end of 2023. We expect average inflation of 7.8% for the year, which should go down to 3.6% in 2024. This means that inflation in Austria will continue to be clearly above the ECB's target", says Pudschedl.
With the recent escalation in the Middle East, the risks posed to the decline in inflation continuing and the economic environment consequently improving have increased – and not just for Austria. "However, we expect the conflict to remain local and not last long, so the impact of temporary oil price fluctuations on inflation will be very marginal. This is why neither the US Federal Reserve nor the ECB should change its monetary policy strategy", says Stefan Bruckbauer.
Should the conflict spread to Iran and/or other countries, oil prices can be expected to rise above the USD 100 per barrel mark, significantly in some cases. If this were to happen, the impact on inflation would be more significant. This could lead to both the Fed and the ECB reacting by hiking rates further and postponing rate cuts, even though this price shock would be purely supply driven.
"However, our baseline scenario continues to assume that the interest rate ceiling has now been reached in the eurozone and that key interest rates will be lowered gradually from the second half of 2024", says Bruckbauer.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at