UniCredit Bank Austria Business Indicator
Recovery on hold but inflation receding and interest rates set to fall
- UniCredit Bank Austria Business Indicator sees sixth consecutive increase, rising to minus 2.6 points in March
- Mood in services sector continues to improve but pessimism growing in construction and in Austrian industrial economy
- Recovery set to be delayed until H2 2024, starting slowly and stimulating only modest economic growth of 0.3% for 2024
- Higher GDP growth of 1.5% expected for 2025 thanks to slight uptick in investment and consumption
- Labour market downturn set to continue until autumn 2024, prompting slightly bigger increase in average unemployment rate for the year to 6.8%
- Inflation continues to trend downwards: Inflation in Austria at 4.4% in Q1; figures below 3% by end of 2024 and 2% by end of 2025 expected
- ECB rate-cutting cycle imminent: Total reduction of 175 basis points in deposit rate by end of 2025 anticipated
Economic sentiment in Austria is slowly recovering, but the prevailing mood is still one of pessimism. "The UniCredit Bank Austria Business Indicator increased in March for the sixth consecutive month. At minus 2.6 points, the indicator has reached its highest level in almost a year but remains well below the long-term average", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. Although the economy has gradually improved since the recession last summer, growth is still very subdued. "The improvement in the UniCredit Bank Austria Business Indicator in the first quarter of 2024, to an average of minus 2.9 points, suggests better performance than had been expected at the end of 2023, but there is still little indication of tangible progress towards a true recovery. In our estimation, at best the Austrian economy started 2024 with a marginal increase of 0.1–0.2% on the previous quarter", says Bruckbauer.
Construction and industrial sector remain the problem children
The latest increase in the UniCredit Bank Austria Business Indicator in March was due primarily to a clear improvement in the mood among domestic service providers. Sharp wage rises, the abolition of cold progression and the noticeable slowing of inflation have boosted the purchasing power of domestic consumers over the past few months, and this has triggered upwards momentum in consumer sentiment. Although there was a pause in this trend in March, certain parts of the services sector enjoyed more tailwind.
While the situation in IT-related sectors and for consulting services, and likewise in tourism and hospitality, was judged to be positive, many business-relevant service companies remained pessimistic, especially those in the construction and real estate sectors. This is due to the continuing deterioration of the mood in the construction sector, fuelled by dwindling orders in the structural engineering sector and various affiliated sectors. Rising construction prices, reduced affordability and challenging financing conditions are posing major challenges, particularly in the housing construction sector. Although the housing package unveiled by the government will bring some improvement, most of the benefits will not be seen until 2025.
"Under pressure due to weakness in construction-related sectors, the mood in the industrial sector deteriorated in March to its lowest level since spring 2020. In addition, high wage increases had a negative impact on the competitiveness of export-focused sectors. That said, the indicator of global industrial sentiment—weighted to account for Austria's foreign trade—pointed to sustained improvement in the export environment", says Bruckbauer, adding. "Underlying conditions continued to improve slightly in March due to stabilisation of the global economy, declining inflation and further progress towards cuts in key interest rates. These developments did not translate into an improvement in sentiment in the construction sector or in Austria's domestic economy, and the emerging tailwind in the services sector also had little effect", says Bruckbauer.
Handbrake hampering acceleration
After a cautious start to 2024 that saw largely sideways movement of the economy, gradual improvement in the underlying conditions is giving rise to hopes of a revival of the Austrian economy from mid-year onwards, although the pace of recovery is likely to remain modest. The revival will be aided by stronger consumption (underpinned by high real wage growth) and the beginnings of a trend reversal in the warehouse cycle. To ramp up to meet customer demand, more and more sectors will start switching from the cost-driven inventory reductions that prevailed in the previous year to cautious replenishment of goods and raw materials stocks. Following a weak start to the year and with only a slight recovery expected in the second half, 2024 as a whole is set to deliver only very modest economic growth of 0.3%. The high levels of uncertainty facing consumers and businesses are slowing the pace of recovery.
"For 2025, we expect economic momentum in Austria to increase to 1.5%. Firstly, support from consumption is set to increase as more and more consumers begin to realise that their purchasing power has improved. Secondly, investment is likely to undergo a revival triggered by interest rate cuts from mid-2024 onwards. As monetary policy is easing both in the eurozone and beyond, the domestic economy is likely to benefit from more international momentum", says UniCredit Bank Austria Economist Walter Pudschedl.
Turnaround on labour market delayed to 2025
The unemployment rate continued to increase in the first few months of the year, reaching its highest level in more than two years in March at a seasonally adjusted 6.8%. Given the slow pace of recovery, the situation on the labour market will not stabilise until the second half of 2024 and improvements are not expected before the start of 2025. The willingness to retain a skilled workforce appears to have declined due to the long period of weakness and the subdued outlook, particularly in construction and industrial sectors. If the workforce potential increases only slowly, however, this will prevent a sharp increase in the unemployment rate. Furthermore, there are still almost 100,000 vacancies reported in the domestic economy.
"As the turnaround on the labour market is likely to shift down a gear, we have slightly increased our forecast for the unemployment rate for 2024 from 6.7% to 6.8%. We remain optimistic that a decline to 6.5% will be possible in 2025 owing to a stronger economy", says Pudschedl.
Inflation climbdown getting tougher
Inflation slowed significantly during the first three months of 2024. Sitting at an average of 4.4%, it was six percentage points lower than in the previous year and one percentage point lower than in the final quarter of 2023. For inflation to fall further, the second-round effects triggered by the rise in energy prices will need to run their course. "Inflation will continue to decline over the coming months. It will take some time for the second-round effects to peter out, however, as prices and wages readjust. This will delay disinflation in the coming months due to a lack of impetus from energy prices. We remain optimistic that inflation will slow to below 3% by the end of 2024. Following an average of 3.6% for 2024, we expect inflation of 2.3% in Austria in 2025", says Pudschedl.
Interest rate cuts in June appear all but confirmed
With inflation continuing to decline and economic data weak (which is also dampening the ECB's concerns about excessive wage pressure), the first rate cut in the eurozone is imminent. "Our forecast of an initial 25-basis-point rate cut in June, which we had in place even before the ECB's last rate hike, seems to be holding true", says Bruckbauer, adding: "The ECB will take a cautious approach going forwards, gradually lowering the rate in increments of 25 basis points; there will be cumulative interest rate cuts of 75 basis points this year and 100 basis points next year. This means that the current deposit rate of 4.00% will fall to 2.25% by the end of 2025. The risk here is that the rate cut cycle will take a slower course."
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at