UniCredit Bank Austria Economic Outlook 2025/26:
Trump 2.0 and the consequences for the global economy, Europe and Austria
- Global economic momentum expected to stabilise at just over 3 per cent in 2025/26
- Prospects limited by geopolitical uncertainties and rising protectionism
- Expansionary fiscal policy enables growth of just over 2 per cent in the USA in 2025 with higher inflation
- Headwinds in global trade dampen economic growth in Europe to below 1 per cent in 2025 and 1.4 per cent in 2026
- While the US is likely to stop cutting key interest rates in 2025, it is to be expected that the ECB will be forced to cut the deposit rate to 1.75 per cent by the end of 2025, slightly below the neutral level, in response to US policy
- Economic weakness is only slowly being overcome in Austria: The UniCredit Bank Austria Business Indicator rose slightly to minus 2.6 points in November
- Interest rate cuts and increases in purchasing power support GDP growth in Austria of 0.9 per cent in 2025 and 1.3 per cent in 2026
- Inflation shock has been overcome, but challenges remain: Average annual inflation falls to 2.2 per cent in 2025 and 1.9 per cent in 2026
- Unemployment rate expected to rise to at least 7.2 per cent in 2025
- US economic policy is becoming the greatest uncertainty factor due to its great importance for the global economy, Europe and Austria
- Austria's economy has clearly lost competitiveness, while China is gaining
“Donald Trump's re-election as US President has set a new course for the global economy. There is only a limited prospect of improvement for the global economy, which is only progressing at a slow pace, especially as the already major geopolitical uncertainties are likely to intensify. The protectionist measures announced will weigh on industry worldwide, as they will dampen global trade, affect business sentiment and cloud the outlook for investment”, says UniCredit Bank Austria Chief Economist Stefan Bruckbauer in his introduction to UniCredit Bank Austria's current economic overview, adding: “However, the global weakness in industry should be compensated for by the service sector, so that global economic growth should stabilise at just over 3 per cent in 2025 and 2026.”
An expansive fiscal policy, mainly characterised by tax cuts, as well as deregulation measures will enable economic growth of 2.1 per cent in 2025 and 2.3 per cent in 2026 in the US, albeit accompanied by upward pressure on inflation due to higher tariffs. Against the backdrop of rising trade barriers, US growth is likely to provide little impetus for the global economy. In China, the stimulus measures should probably prove sufficient to maintain financial stability and minimise the risk of outright deflation, but it is unlikely that they will be able to significantly boost private consumption and move the country away from its structurally weaker growth path.
In addition to increased protectionism in global trade, the situation in the eurozone is being made more difficult by the ongoing process of budget consolidation and the lack of a clear strategic direction in industrial policy. However, the further easing of monetary policy should have a positive impact on economic conditions, meaning that economic growth should increase slightly.
“We expect the eurozone economy to gradually increase its growth rate to 0.9 per cent in 2025 and 1.2 per cent in 2026, following a 0.8 per cent increase in GDP this year based on domestic demand. However, the headwind in foreign trade due to higher tariffs in the USA, the eurozone's most important trading partner, will hardly allow the European economy to reach its potential”, says Bruckbauer.
The downside risks outweigh the upside risks for these growth forecasts, as the economists at UniCredit Bank Austria assume a partial and staggered introduction of US tariffs and no escalation of tensions in the Middle East. “A more aggressive US policy would have a much greater impact on global trade, confidence, investment and labour markets. If tensions in the Middle East were to increase, oil prices would skyrocket”, says Bruckbauer, listing some of the risks and emphasising: “Such a shock would hit the eurozone much harder than the US and trigger a further divergence between the two economies.”
Europe and the USA are also drifting apart in terms of monetary policy
Despite the high level of geopolitical uncertainty, a major energy price shock for 2025 does not appear likely from today's perspective. In addition, the global oil market is expected to be oversupplied, particularly due to high production in the US, which should keep the price of crude oil in the range of USD 75 to 80 per barrel. This supports the further convergence of inflation towards the central banks' targets, especially as service price inflation would slow down as wage pressure eases and core inflation in goods prices would remain low.
In the eurozone, inflation is likely to reach the ECB target for the first time in five years at an annual average of 1.9 per cent in 2025 and 2026. The USA is unlikely to follow this trend. As a result of the Trump administration's trade, tax and immigration policies, inflation in the US should be well over 2 per cent higher than in the eurozone, even if the timing and extent of the economic policy changes are uncertain.
“The consequence of the different inflation dynamics will be a divergence in monetary policy between the US and Europe. The US Federal Reserve is expected to stop cutting interest rates at 3.75 to 4 per cent for the Fed funds target rate from the current 4.50 to 4.75 per cent, while the European Central Bank ECB will be forced to cut interest rates slightly below a neutral level. From the current 3.25 per cent, the deposit rate could be as low as 1.75 per cent by the end of 2025, as a counterweight to the burdens on the European economy caused by US tariffs”, says Bruckbauer.
Due to the interest rate differential between the US and the eurozone, a further weakening of the euro against the US dollar to up to USD 1.02 per euro by the end of 2025 can be expected. Should the euro weaken more significantly, the ECB would have less room for manoeuvre to cut interest rates below the neutral mark. By contrast, the upward pressure on long-term yields in the eurozone resulting from a potential sell-off in US government bonds would argue in favour of faster and deeper interest rate cuts by the ECB. The key interest rate level should not change in 2026, as inflation should fluctuate around 2 per cent, provided no major commodity price shock occurs.
Sentiment in Austria remains tense
“So far, the Austrian economic data and sentiment indicators show little sign of the expected economic improvement for 2025 and 2026. However, the current UniCredit Bank Austria Business Indicator has risen slightly to minus 2.6 points, which still reflects a clearly pessimistic mood in the Austrian economy”, says UniCredit Bank Austria economist Walter Pudschedl, adding: “The economic picture in Austria continues to be characterised by major challenges in the manufacturing sector, which the service sector is trying to counter. Despite a slight improvement in the export environment, sentiment in both the construction and industrial sectors continued to decline in November. Only in the service sector did pessimism ease somewhat, although the mood among domestic consumers deteriorated for the third month in a row.”
Rising purchasing power and lower interest rates will stimulate the Austrian economy
In view of the consequences of the US economic policy reorientation for global trade and the structural problems in the heavily export-oriented Austrian industrial sector, foreign trade is not expected to make a significant contribution to an economic improvement in Austria over the next two years. The recovery of the domestic economy therefore depends crucially on the development of domestic demand.
“Domestic demand will do the trick”, says Pudschedl optimistically, adding: “Firstly, consumption will accelerate as real wages return to pre-inflation shock levels. However, increased economic uncertainty and the weakening labour market will probably prevent a significant decline in the savings rate from its current high level and therefore only lead to a moderate revival in consumption. Secondly, the easing of monetary policy should support the construction sector and industry and thus increase investment activity.”
In view of the unfavourable outlook for foreign demand, the economists at UniCredit Bank Austria expect only a moderate improvement in the Austrian economy and, following the 0.5 percent decline in GDP this year, expect economic growth of 0.9 percent for 2025 and 1.3 percent for 2026.
Challenges on the labour market are still increasing
In view of the generally weak growth prospects, the labour market is expected to deteriorate further in 2025, primarily due to the industrial sector. However, given the tightness of the domestic labour market, the deterioration trend will remain relatively subdued. The average unemployment rate is likely to rise to 7.2 per cent in 2025, after 7.0 per cent in 2024. Despite the slow pace of recovery, the unemployment rate is likely to fall slightly to 7.0 per cent in 2026, dampened by the slight increase in labour supply.
Inflation largely on target
Despite the upward trend at the beginning of the year to around 2.5 per cent, inflation will fall to an annual average of 2.2 per cent in 2025 due to the expiry of government measures to curb energy prices, especially as the second-round effects in the services sector continue to fade and energy prices should remain largely stable. Provided there are no sharp spikes in commodity prices, the stable inflation trend should continue in 2026, allowing for an inflation rate of just 1.9 per cent. This means that inflation in 2026 is likely to reach the ECB's annual average target for the first time in six years.
Risks
The economic outlook of UniCredit Bank Austria's economists for the next two years is characterised by unusually high risks. However, for Austria's economy as a whole, two thirds of demand comes from within the country, and this will be decisive for economic development in 2025. For industry, however, two thirds of demand comes from abroad. Austria's competitive position has deteriorated significantly since 2020 and has suffered a ten per cent revaluation in relation to its most important trading partners. At the same time, China has been able to achieve a devaluation of over twenty per cent in the last ten years. “Even if the Austrian economy in 2025 will be largely determined by the domestic market, Austria is currently at a disadvantage in the intensifying trade conflict due to an increase in its real effective exchange rate of around ten per cent since 2020”, concludes Bruckbauer.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 5 05 05-41957;
E-mail: walter.pudschedl@unicreditgroup.at