Economic Status: Mood will improve slowly

That's the conclusion reached by economists at Austria's UniCredit Bank. “The UniCredit Bank Austria economic index rose for the sixth month in a row in March,” Chief Economist Stefan Bruckbauer said on Monday. “At minus 2.6 points, the indicator reached its highest value in almost a year, but remained below the long-term average.”

Since the recession in the summer of 2023, the economy is gradually recovering, but the economy is still very depressed. Bank Austria economists forecast that the Austrian economy started 2024 with, at best, a modest increase of 0.1 to 0.2 percent compared to the previous quarter. They do not expect the domestic economy to pick up until mid-year, meaning economic output could grow by at least 0.3 percent this year.

Significant goodwill among domestic service providers

The current increase in the economic indicator in March is primarily due to a significant improvement in the mood of domestic service providers. Strong wage growth, an end to cold growth and a significant slowdown in inflation in recent months have strengthened the purchasing power of domestic consumers and supported the upward trend in consumer sentiment.

While the situation was assessed as positive in the IT sectors and tourism and hospitality, many business-related service companies, particularly in the construction and real estate sectors, were pessimistic. This is due to continued deterioration in construction sentiment due to lack of orders in building construction and many ancillary industries. Rising construction costs, reduced affordability and difficult financial conditions have created challenges for residential construction in particular. Economists expect improvement from the government's housing package, but it will mainly come into effect from 2025 onwards. Domestic industry sentiment fell to its lowest level since spring 2020, hurt by weakness in construction-related sectors.

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The situation in the labor market is expected to stabilize only in the second half of 2024, and to improve again only in early 2025. “As the turnaround in the labor market may be somewhat postponed, we have raised our unemployment rate from 6.7 percent to 6.8 percent for 2024,” said Walter Putschedl, economist at Bank Austria. “By 2025, we are optimistic that a 6.5 percent decline will be possible with an improving economy.”

Consumer price inflation is expected to moderate

Consumer price inflation is expected to moderate further throughout the year. “We are optimistic that inflation will drop below 3 percent by the end of 2024,” Pudschedl said. Economists expect the inflation rate in Austria to be 2.3 percent in 2025, after an average of 3.6 percent in 2024.

Bank of Austria economists continue to expect a cut in key interest rates by the European Central Bank in June. “The ECB will take a cautious course, with cumulative interest rate cuts of 75 basis points this year and 100 basis points in 2025, with gradual cuts of 25 basis points each,” Bruckbauer said. “This means the deposit rate will drop to 2.25 percent from the current 4.00 percent by the end of 2025.”

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