Lessons from 2020: rebound effects should not be underestimated
Austria can be described as a "first mover" with regard to the timing and stringency of the first lockdown. Because earlier than other Western European countries, the decision was made here for a full-scale and nationwide lockdown. This was accompanied by the premature and abrupt end of the winter season, which had been very successful until mid-March (overnight stays in the winter season until the end of Feb. 20: +7 % p.a.), and the east-west divide in the labour market within Austria was then reversed completely due to the regional systemic relevance of winter tourism (unemployment at the end of March: Vienna: +39 % p.a., Tyrol: +199 % p.a.). The tourism sector, in normal times a kind of stabiliser through which the industry-heavy and small-open Austrian economy sometimes feels the ups and downs of the global economy to a lesser extent, suddenly became the epicentre of the economic distortions. Since the first lockdown, monthly overnight stays figures have become an indispensable part not only of the main news but also of any economic analysis. However, the strong focus on winter tourism and thus on the months of November to April initially proved to be a "competitive advantage" over the "Club Med" countries of the euro area. For the Mediterranean countries, the first lockdown in spring and the summer months, marked by restrictions, travel warnings and uncertainty, had a far less favourable seasonality. Another mitigating factor for Austrian tourism was the fact that apart from Vienna's city tourism, the vast majority of overnight stays were accounted for by guests from within Austria or from neighbouring countries, which meant that Austria's summer tourism came through the Corona year better than the classic summer destinations in southern Europe. True to the motto "better by car to the Alps than by plane to faraway places", especially those Austrian provinces whose guests traditionally come from home or the "neighbouring countries" and especially Germany got off lightly, while the focus on international tourists as well as congresses and events practically brought Vienna's city tourism to a standstill.
However, the cyclical nosedive in the first and second quarters was still more pronounced than in Germany (-11.5%) or the classic "peers" such as Finland (-5.3%) and the Netherlands (-9.9%) with a combined 14% (compared to Q4 19), which primarily reflects the greater "tourism exposure" (higher value-added share of the hotel and catering industry), but also to a certain extent Austria's stricter measures (especially compared to Finland). However, the historic economic free fall in the second quarter (-11.6% p.q.) was followed by a no less historic upswing (Q3: +12.0% p.q.), which was more pronounced than expected in Austria, but also in most other countries. In this respect, we are not too negative about possible rebound effects in 2021. While on the one hand it was underestimated how quickly pent-up consumer demand would find its way into retail shops (also in the absence of other consumption opportunities), Austrian industry benefited from the fast and pronounced rebound of world trade and the surprisingly strong ramp-up of German car production in particular. Demand from the CE region also developed slightly better than foreign demand for Austrian products as a whole, so the close trade links with the countries in the region had a (slightly) stabilising effect (unlike during the financial crisis). But at the same time, it became obvious that coexistence with the virus in many consumption-related and thus mostly contact-intensive service industries was only possible to a limited extent. The post-lockdown rebound thus resembled a sprinting competition in which some participants already had the finish line in sight while others were still in the starting blocks.
Tourism: A hard winter ahead of us*
|Source: * overnight stays, % yoy; Statistics Austria, RBI/Raiffeisen Research|
"Yo-Yo economic cycle" pattern come to stay, Germany exposure helps on several levels
The Austrian Corona summer of 2020 was characterised by a comparatively low incidence of infections, low restrictions (lower than the average in Western Europe) and the hope that targeted measures would, if not prevent, at least significantly mitigate a second wave in autumn and winter 2020/2021. However, the reality was known to be different, which is why the second hard lockdown followed in mid-November, which has been tightened again since 26 December after an interim relaxation (third lockdown). The economic restrictions between the first lockdown in spring and the second and third in November and December hardly differ. Does this mean another economic slump is imminent? Anything other than a significant decline in GDP in the final quarter of 2020 would be a big surprise. However, the "bout of economic weakness" should be much less severe than during the first lockdown. Accordingly, the "yo-yo economic cycle" - the key characteristic of the economic development shaped by the lockdown and easing - should be much less pronounced in the winter half-year (Q4/Q1); even if at 15% a similarly high share of economic output is affected by the lockdown 2.0 & 3.0. This is because the service sectors, which are currently being hit hard, have so far only been able to partially compensate for the massive value-added losses of the first lockdown, which is why the "drop" is now sometimes significantly lower. The decline is therefore taking place from a lower starting level than in March, when the shutdown hit companies out of the blue with good capacity utilisation.
The fact that the Austrian economy is not threatened with a free fall like in the spring despite a clearly negative fourth quarter is also due to the changed role of industry, which accounts for almost 19% of value added (2019) and thus has a disproportionately high overall economic significance in comparison to the euro area average. During the first lockdown, industry was also caught in the Corona-induced downward spiral, even though manufacturing was not formally affected by the lockdown. However, the first wave was de facto countered with a "global" and "European lockdown", which caused global demand and thus also the volume of world trade to collapse. Precautionary plant closures and disrupted supply chains also contributed to this situation. In contrast, the "second wave" of lockdowns is primarily a European and partly a US phenomenon, while infections in Asia are largely inconspicuous, which is why Asia can currently act as a stabiliser of world trade. This means that Austria can once again benefit from its close economic ties with Germany, Europe's gateway to Asia. This should counteract a significant slump in Austrian exports, which have returned to normal to a certain extent (September: +0.1% p.a.; May: -25.4% p.a.). The Austrian economy thus starts the new year with a dichotomy, as it did 12 months ago. However, industry and consumer-related services have now swapped roles, so Austria's high industrial share is currently acting as a counterweight to the (partially) cancelled winter season (as a reminder, at the end of 2019 we were close to an industrial recession in Europe).
Already during the summer months, the tourism industry turned its attention to the winter season (November-April), which is more important in terms of value added. As early as October, the increasing number of infections in Austria as well as in the countries of origin became noticeable in the overnight stays statistics (-49% p.a.; foreign guests: -67%). The loss of overnight stays in November due to the lockdown is still bearable (a good 3 % of the total overnight stays in a year), but the loss in December is already painful. However, the months of January to March are decisive for the winter season, as these months account for about 32 % of the total overnight stays in a year. Almost 40 % of the expenditures of foreign guests (tourism exports according to the Balance of Payments) are made in the first quarter.
Even if a certain amount of tourism, including foreign guests, could be possible again as of 18 January according to the current status, only a limited and only very hesitantly recovering winter tourism is to be expected. This will probably be helped by the restrictions imposed in January by important tourist source markets on the return journey from Austria (quarantine obligation). The weal and woe of the 2020/21 winter season thus depends to a certain extent on the "goodwill" of the governments of important tourist source countries. Berlin, The Hague and London will therefore play a role in deciding how severe the inevitable drop in overnight stays will ultimately be. The recovery in the hotel and restaurant sector is not expected to pick up speed until February. But even then it can be assumed that the level of value added in March will still be far below the level that prevailed before the last tourism lockdown (October).
GDP plot Austria & the "Yo-Yo economic cycle"*
|Source: * real GDP indexed, Q4 2019=100; Eurostat, RBI/Raiffeisen Research|
Acceptance of vaccination crucial to avoid "stop and go" lockdowns well into 2021
All in all, the "yo-yo economy" is also likely to characterise the second and third lockdown and easing phases, even if the swings will now be smaller: Based on the outlined trends, we expect GDP to decline by "only" 4.0% p.q. in Q4 2020, much less than in Q2 2020 alone, when economic output slumped by 11.6% p.q. The deeper the fall, the greater the impact. The deeper the fall, the greater the subsequent rise. This pattern is also likely to be observed after the foreseeable GDP decline in the final quarter of 2020, even if this time a delayed rebound can be assumed (Q1 2021: +1.0 % p.q.). This is because until well into the first quarter of 2021, economic activity is likely to be subject to restrictions that go beyond the "normal state" recorded after the first lockdown. However, with the broader availability of vaccination expected from spring 2021, the "stop and go" of lockdowns and subsequent easing characteristic of 2020 should be broken and economic activity should pick up speed (Q2: +2.5 % p.q.). Private consumption should continue to play a central role in 2021 - but this time with a reversed sign - and prove to be a key driver of the recovery in 2021 given the pent-up consumer demand (forced and precautionary saving). In contrast, equipment investment is likely to show rather low growth rates for a recovery phase in view of the increased debt and foreseeable rise in corporate insolvencies as well as an unusually strong investment cycle in Austria in previous years. For 2021 as a whole, we expect GDP to increase by 3.5%, despite the unfavourable starting conditions (GDP decline in Q4 20 and delayed rebound in Q1/Q2). However, this does not really make up for the projected 2020 decline of 7.2% (both forecasts have been almost universally valid since April 2020), and the pre-crisis level (2019) is not likely to be reached again until early 2023.
Admittedly, the year 2021 is not poor in risks (possible expiry of state support, corporate insolvencies, Corona as an accelerator of structural upheavals). Nevertheless, we believe that at least one thing can be said: Based on an exceptional crisis of the century in 2020, the further downside potential is lower than ever before. The question is not whether the rebound will come, but rather how pronounced it will be in the small and open Austrian economy.
Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.