UniCredit Bank Austria Economic Indicator
Economic stabilisation, but no noticeable recovery in sight for 2025
- UniCredit Bank Austria Business Indicator rose for the second month in a row in February, but remains in recessionary territory at minus 2.2 points
- Slight improvement in sentiment since the turn of the year, led by the service sector, with pessimism also falling in industry
- Economic stabilisation expected over the course of 2025, supported by monetary policy easing and real wage growth thanks to lower inflation
- But: Budget austerity in Austria dampens revival in domestic demand and US tariff policy challenges export industry
- After a decline in GDP of 1.2 per cent in 2024, the Austrian economy will probably only just escape a third year of recession in 2025. Noticeable economic growth of 1.3 per cent is not expected until 2026
- The weak economy will cause a further increase in the unemployment rate to 7.3 per cent in 2025, with no improvement expected for 2026
- Inflation likely to fall to an annual average of 2.5 per cent in 2025 and further to 1.9 per cent in 2026
- Further ECB rate cuts expected, but fiscal stimulus in Europe could pace
“At the beginning of 2025, the Austrian economy was unable to overcome the economic weakness, which ultimately even resulted in a 1.2 per cent decline in GDP in the previous year. The few hard economic data available to date show a continuation of the recession in domestic industry in the first months of 2025 in view of a persistently weak order situation in a difficult international environment. In addition, the service sector continues to be burdened by the prevailing uncertainty among consumers, which has triggered a high propensity to save. Revenue development in tourism is not keeping pace with the record number of overnight stays and the revival seen in the retail sector in autumn did not continue around the turn of the year,” says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.
While the Austrian economy got off to a false start in 2025 and there is no immediate improvement in sight, the currently somewhat more favourable sentiment indicators at least give hope that the economy will stabilise over the rest of the year. “The UniCredit Bank Austria Business Indicator has shown a slight upward trend since the beginning of the year, with two consecutive rises. However, at minus 2.2 points, the indicator was still at a very low level in February, which only indicates a weakening of the recession in Austria. However, the fact that all components contributed to the increase in February for the first time in two years is particularly positive,” says Bruckbauer.
Tense situation in the industry continues despite improvements
The biggest contribution to the rise in the UniCredit Bank Austria Business Indicator in February came from declining pessimism in industry. Despite the uncertainty caused by increasing protectionism in foreign trade and higher costs, which led to a reduction in price competitiveness, the mood on the domestic sales markets improved. This was also reflected in an increase in the production expectations of Austrian industrial companies. However, sentiment in the sector and production expectations for the coming months remain well below the long-term average.
While domestic industry remains in recession despite an improvement, there were cautious signs of economic stabilisation in the construction sector in February. In the service sector, business expectations were even slightly positive. The service sector should remain on course for growth and momentum should even pick up slightly in the coming months. However, sentiment in the sector and demand expectations for the coming months remain below the long-term average, which is likely to keep the upswing weak.
Noticeable growth not expected until 2026
The slight increase in economic sentiment at the start of 2025 is encouraging, but there are currently no signs of a rapid end to the weak economic growth.
“We remain optimistic that the further reduction in interest rates by the ECB and lower inflation will have an increasingly positive impact on the development of domestic demand over the course of the year. However, restrictive fiscal policy on the one hand and increased protectionism in foreign trade on the other will limit growth prospects,” says UniCredit Bank Austria economist Walter Pudschedl, adding: “We have adjusted our GDP forecast for 2025 to 0.1 per cent due to the less favourable conditions from the previous year. Austria should therefore be spared a third year of recession.”
The Austrian economy should not be able to show any more vigour until 2026. Consumption should benefit more from real wage growth and the gradual decline in the savings rate, and the easing of monetary policy should revitalise the willingness of domestic entrepreneurs to invest. In view of the decline in price competitiveness in exports and the increasingly protectionist global environment, the challenges remain considerable.
“The announcement of increased infrastructure investment in Germany and the easing of fiscal rules come at just the right time, but will not take effect until 2026,” says Pudschedl, adding: “Nevertheless, we only expect economic growth of 1.3 per cent in Austria in 2026.”
Unemployment continues to rise
Although the labour market is relatively robust in view of the ongoing economic weakness, unemployment continued to rise at the start of 2025. In February, the seasonally adjusted unemployment rate in Austria was 7.3 per cent. “The upward trend in the unemployment rate will continue for the time being, but will remain manageable. For 2025, we expect an annual average unemployment rate of 7.3 per cent, which should stabilise at this level in 2026,” says Pudschedl.
Inflation retreat slows down
At the beginning of the year, inflation in Austria rose to over 3 per cent year-on-year due to the expiry of the electricity price brake and higher energy prices, fuelled by the weakening of the euro. There now appears to be a shift in the drivers of inflation.
“While energy prices are expected to trend sideways over the remainder of 2025, food prices are likely to exert slight upward pressure. A moderate rise in goods inflation should be more than offset by the slowdown in services inflation due to the expiry of second-round effects, which will gradually reduce core inflation and headline inflation. We expect inflation to fall to an annual average of 2.5 per cent in 2025, with rates close to the ECB's target of 2 per cent towards the end of the year,” says Pudschedl. For 2026, the economists at UniCredit Bank Austria expect inflation to average 1.9 per cent.
Further interest rate cuts expected, but uncertainty has increased
As expected, the ECB cut its key interest rates by a further 25 basis points in March. Since summer 2024, the deposit rate has been reduced by a total of 150 basis points to just 2.50 per cent.
“The year 2025 is likely to bring further interest rate cuts, but the uncertainty surrounding the ECB's upcoming monetary policy decisions has increased significantly, both in terms of the extent and the timing. On the one hand, US tariff policy could shift economic risks further downwards. On the other hand, increased fiscal measures could support the economy in Europe and increase inflation. We continue to expect three interest rate hikes by the end of the year with a reduction in the deposit rate to 1.75 per cent, but the balance of risks has shifted towards lower interest rate cuts,” 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