UniCredit Bank Austria Business Indicator
Sentiment improved slightly at the start of the year, but economy continues to weaken
- Although the low in sentiment at the end of the year was overcome, the UniCredit Bank Austria Business Indicator remained in negative territory at minus 2.6 points despite a slight increase in January 2025
- The improvement was mainly driven by the services sector and a somewhat brighter export environment
- A greater willingness to consume and invest due to lower inflation and interest rates should make domestic demand the driving force behind a slight recovery over the course of the year
- We have lowered our GDP forecast for 2025 from 0.9% to 0.3%. This is due to a lower statistical overhang and restrictive fiscal measures
- Despite headwinds at the start of the year, the expiring second-round effects should inflation to fall from 2.9 percent in 2024 to 2.5 percent in 2025 and further to 1.9 percent in 2026
- The unemployment rate will rise to an average of 7.3% in 2025. No improvement is expected for 2026
- Further interest rate cuts by the ECB to below the neutral level
Economic sentiment in Austria improved slightly at the start of the year. “The UniCredit Bank Austria Business Indicator rose to minus 2.6 points in January, but remains at a very low level for the time being”, says UniCredit Bank Austria Chief Economist Stefan Bruckbauer, adding: “Following the deterioration in the second half of 2024, which culminated in a low for the year in December, economic sentiment in Austria recovered slightly at the start of the year.” Although the problems in the export business continue to be a burden, the improved conditions for domestic demand due to lower inflation and lower interest rates are becoming more noticeable for entrepreneurs and consumers in Austria and have led to a slight improvement in the sentiment barometer. “However, the level of the UniCredit Bank Austria Business Indicator remains low and is at a similar level to the annual average for 2023 and 2024, both years that saw GDP in Austria fall by around one percent”, Bruckbauer continues.
Sentiment improved in almost all economic sectors at the start of the year
The rise in the UniCredit Bank Austria Business Indicator was driven by a general improvement in economic sentiment at the start of 2025. Only in construction did sentiment deteriorate again somewhat in January. While the situation in the finishing trades remained stable and even improved significantly in civil engineering, the moderate development of orders in building construction caused increasing concern. Boosted by a slight improvement in global industrial demand, particularly in some European sales markets, pessimism in the manufacturing industry in Austria declined somewhat, but remained very high in a long-term comparison. As in previous months, food production was the only industrial sector at the beginning of the year in which the economic mood was positive.
“The main reason for the rise in the UniCredit Bank Austria Business Indicator in January was the significant improvement in sentiment in the service sector. In addition to tourism and retail, the motor vehicle trade and transport services also felt more tailwind”, says Bruckbauer, adding: “Overall, however, sentiment in the services sector in January remained below the long-term average, burdened by the unchanged high level of consumer uncertainty. Despite high real wage increases, consumers continued to exercise restraint in their spending and saved more than usual.”
Economic sentiment in Austria continues to lag behind that in Europe. In all sectors of the domestic economy, the assessment of the situation was less favorable than in the eurozone. However, the gap has now narrowed compared to previous months. In industry, however, pessimism in Austria is still significantly higher than the European average.
Small steps out of stagnation
"One swallow does not make a summer”, says UniCredit Bank Austria economist Walter Pudschedl, adding: “The slight increase in economic sentiment in Austria at the start of 2025 is encouraging, but there are currently no signs of a rapid end to the weak growth of the Austrian economy. However, we remain optimistic that the improvement in general conditions will have an increasingly positive impact on domestic demand over the course of the year and that Austria will be spared a third year of recession. However, increased protectionism in foreign trade on the one hand and a restrictive fiscal policy on the other will limit growth prospects. We have reduced our GDP forecast for 2025 from 0.9% to 0.3%.”
Economic development in Austria in 2025 will depend crucially on how quickly and how strongly the easing of inflation and the further loosening of monetary policy will affect the dynamics of consumption and investment. As nominal wage increases are once again expected to exceed inflation, real purchasing power will continue to increase and the losses from the inflation shock will finally be offset over the course of the year. As a result, domestic consumers should slowly abandon their reluctance to spend. However, the continuing high level of uncertainty, increasing concerns about employment and budgetary measures will counteract a strong revival in consumption. Further interest rate cuts by the ECB should have a positive impact on domestic companies' willingness to invest, particularly in the construction sector. However, the current below-average capacity utilization in the domestic economy and the headwind in the export business due to a weakened competitive position and the intensification of protectionism stand in the way of a significant increase in investment momentum for the time being.
Unemployment continues to rise, but only moderately
In view of the ongoing economic weakness, the labor market in Austria remains relatively robust. The seasonally adjusted unemployment rate was 7.2% in January, with a slight upward trend. “The upward trend in the unemployment rate is expected to continue into 2026, but will remain manageable. After an average of 7.2% in 2024, we expect an unemployment rate of 7.3% in 2025, which should stabilize at this level in 2026”, says Pudschedl. The slower increase in the labor supply due to the retirement of the baby boomer generation, lower immigration and the high popularity of part-time work will counteract a sharp deterioration in the situation on the labor market.
Inflation rise at the start of the year only temporary
Following the low inflation figures at the end of 2024, there was a significant price surge at the start of the year, triggered by the expiry of the electricity price brake, the increase in the CO2 price and price adjustments due to tourism. However, the year-on-year rise in inflation to over 3% was surprisingly strong, which is likely to have been driven by cost-related price increases in some service sectors with good demand growth. After the second half of 2024 was characterized by a convergence, Austria is once again showing a noticeable inflation premium compared to the eurozone.
However, second-round effects in the services sector and a decline in the pricing power of goods manufacturers in light of the weak economy should ensure a gradual slowdown in inflation in the coming months. “Due to the surprisingly strong rise in inflation at the start of the year, we have raised our forecast for 2025 from an average of 2.2% to 2.5%. Due to the continued easing of price pressure from the services sector and assuming that there are no distortions on the commodities markets, we continue to expect inflation of 1.9% for 2026”, says Pudschedl
Further key interest rate cuts in the pipeline
As expected, the European Central Bank has started 2025 with a further interest rate cut of 25 basis points. “In view of the easing of inflation, we expect the ECB to continue to loosen monetary policy in the eurozone in the coming months. By the end of 2025, we expect key interest rates to be reduced by a further 100 basis points, meaning that the deposit rate should reach its final level in the current interest rate cycle at 1.75%”, says Bruckbauer, adding: “The ECB's monetary policy is likely to become slightly expansionary by lowering interest rates to below the neutral level of around 2%. In our view, the subdued economic outlook and the burdens on the European economy caused by the protectionist foreign trade policy of the USA could prompt the ECB to take this step.”
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 5 05 05-41957;
E-Mail: walter.pudschedl@unicreditgroup.at