10.05.2023

Business Expectations Improve Despite High Inflation

WIFO Business Cycle Report May 2023

Against the background of the international economic slowdown, Austria's economic performance declined in the first quarter. Weak export dynamics weighed on industry. In April, the assessments of domestic companies in the manufacturing industry regarding the current situation deteriorated again, but their expectations brightened. This points to an expansion of production activity in the coming months.

"Companies' assessments of the future business situation improved in April. Service providers were particularly optimistic. The expectations index also rose in industry and retail, only in the construction industry it declined," says Sandra Bilek-Steindl, author of the current business cycle report.

After the decline in Austrian economic output in the first quarter (–0.3 percent compared to the previous quarter), leading indicators point to a slow improvement in the economy. According to the WIFO-Konjunkturtest (business cycle survey) of April, business expectations have brightened recently, especially in the service sector.

Austria's manufacturers suffered from the international economic slowdown in the first quarter. In the April survey of the WIFO-Konjunkturtest (business cycle survey), most of them reported a slight reduction in production. The outlook, however, already paints a more positive picture. The UniCredit Bank Austria Purchasing Managers' Index fell again in April to its lowest level since May 2020.

The first quarter was also only moderate in Germany. Weak consumer demand from private households is likely to have been responsible for the stagnation of the economy. The mood of German companies improved further in April according to the Ifo Business Climate Index.

Domestic consumer confidence (according to the European Commission) recently remained almost unchanged at a low level. In April, the component indicating the development of the general economic situation in the next 12 months deteriorated. In contrast, the assessments of the financial situation of private households in the last 12 months showed an improvement.

Business in the retail sector was weak at the beginning of the year. According to preliminary data from Statistics Austria, net sales in the first quarter were 2.9 percent lower than in the previous year after price adjustments (excluding motor trade). The decline in sales was particularly strong in the non-food segment.

Consumer price inflation slowed to 9.2 percent in March, after having been around 11 percent in January and February. The development of fuel prices had a dampening effect due to a base effect: energy commodities had jumped in price in March 2022 following the outbreak of the Ukraine war. In April, headline inflation (CPI) accelerated to 9.8 percent according to Statistics Austria's flash estimate.

The economic weakness is already showing on the labour market. The number of unemployed (including people in training) was higher in April than in the previous year for the first time in over two years. Although employed active employment expanded again (expected +1.5 percent compared to April 2022), it stagnated in the previous month's comparison. The unemployment rate is expected to have been 6.3 percent in April (seasonally adjusted, national definition).

Please find the entire business cycle report here (German version).