OeNB Report 2023/7: Economic outlook for Austria – Consumption bolsters recovery in 2024

Economic outlook for Austria from 2023 to 2026 (December 2023)

Cutoff date: November 30, 2023

Mathias Moser, Doris Prammer, Martin Schneider, Richard Sellner and Alfred Stiglbauer ¹

The Austrian economy has been in recession since the second half of 2022. This is due to fading catch-up effects following the end of the COVID-19 pandemic, higher energy prices in the wake of Russia’s war of aggression against Ukraine, high domestic inflation as well as the weak international environment, among other factors. Leading indicators consistently show that the economy has not quite bottomed out yet, pointing to a further slight contraction in the fourth quarter of 2023.

For 2023 as a whole, the OeNB expects real GDP to contract by 0.7%, mainly because of declining investment, lower private consumption and weak inventory buildup. Investment has been dampened by higher financing costs, high energy prices and pessimistic expectations. This is particularly evident in residential construction investment, which has suffered the sharpest decline. For 2024, we expect moderate positive GDP growth of 0.6%, mainly driven by stronger consumer demand on the back of lagged inflation-related wage and pension increases and falling inflation. In 2025 and 2026, the economy is expected to grow by 1.7% and 1.3%, respectively, aided by consumption, investment and stronger export growth. As a result of the recession, the situation on the labor market has deteriorated as well. The unemployment rate as defined by the Public Employment Service Austria (AMS) will increase from 6.3% in 2022 to 6.8% in 2024.

HICP inflation will reach 7.7% in Austria in 2023, a level well above the euro area average. This is mainly due to the lagged pass-through of falling energy prices, as well as strong services and food price inflation. Inflation is expected to come down to 4.0%, 3.0% and 2.5%, respectively, in 2024, 2025 and 2026 as energy price pressures ease.

With the expiration of COVID-19-related measures, the public budget deficit is set to improve significantly, to –2.6%, in 2023. Despite improving economic activity, the deficit will remain close to the 3% deficit threshold in the subsequent years. The debt ratio will only improve marginally over the forecast horizon. The risks to the growth outlook are predominantly tilted toward the downside. They include a further intensification of the conflict in the Middle East and a larger loss of export market shares in the wake of deteriorating price competitiveness. The risks to the inflation outlook appear balanced.

Exports only weakly support expected economic upswing

Austria’s external environment became increasingly gloomy in the course of 2022 because of the war in Ukraine and ongoing supply bottlenecks that only gradually started to ease. At the moment, persistently high inflation and the impact of global monetary policy tightening are the main factors weighing on global activity. As a result, global growth has remained very subdued in 2023. This is particularly evident in the advanced economies, where growth has almost halved compared to 2022, though some stimuli came from the United States on the back of strong domestic demand. In the euro area, on the other hand, the recovery has almost come to a standstill in 2023, with real GDP growth of 0.6%. In Germany, Austria’s most important trading partner, economic output even contracted by 0.1% in 2023. An important driver of this slowdown is weak global trade, which almost stagnated in 2023 with growth of 0.7%.

Following a recovery in 2022, Austrian exports expanded only weakly in real terms in the first three quarters of 2023. Leading indicators currently suggest that export activity will stabilize at a low level in the coming months. While export order books are still showing a slight downward trend, the earlier decline in incoming export orders has stopped and there has been a stabilization for some months now.

Our forecast is based on the assumption of a recovery in global trade from 2024 onward. However, at just over 3% annually from 2024 to 2026, the expected growth is only moderate. Against this background, real exports of goods and services are expected to only record weak growth of 1.8% in 2023. We do not expect tourism to provide major stimuli via further catch-up effects over the forecast horizon, as the number of overnight stays observed from January to October 2023 was already very close to the level last seen in 2019.

Unit labor cost (ULC) will grow by 5.8% per year on average over the forecast horizon (2023–2026), which is 2.1 percentage points above average euro area growth. Stronger ULC growth is causing Austria’s price competitiveness to decline, leading to a loss of market shares. This and the assumed weak recovery in world trade will result in an average annual increase in real net exports of 2.1% from 2024 to 2026. Overall, Austrian real export growth rates will remain well below the long-term average observed prior to the COVID-19 pandemic (1999–2019: 4.2%). The deterioration in the terms of trade caused by energy price increases will be partially offset in 2023. The current account is therefore recovering following its slump in 2022 and will be back in surplus over the forecast horizon.

Unfavorable conditions for investment

Investment growth slowed down significantly in 2022 due to a number of factors. In addition to higher financing costs and high energy costs, the war in Ukraine led to a deterioration in business sentiment. This is reflected in a marked decline in confidence indicators, which have fallen significantly from their peak in mid-2021.

Investment in equipment – which was already highly volatile in 2021 and 2022 – plummeted in the first and third quarters of 2023. For 2023, this will result in a decrease of 4.8%; in 2024, investment will remain weak and there will be a further decrease of 1.5%. In 2025 and 2026, investment in equipment is expected to follow the business cycle and accelerate, though moderately as a result of higher financing costs.

As R&D investment is to a large extent internally funded, it was robust to interest rate increases in 2022 and 2023. Although growth slowed down in these two years compared to 2021 (12.5%), it remained strong at 5.2% and 4.3%, respectively. As a result of weaker growth in mid-2023, we expect a further slowdown to 2.6% in 2024.

Residential construction investment is most affected by the rise in financing costs, with interest rate increases coinciding with the end of the residential construction cycle. Residential construction peaked in 2022, with 77,300 newly completed homes. However, already at the time, the number of building permits indicated an imminent decline in construction activity. Mirroring the situation in Germany and the euro area as a whole, new housing loans in Austria dropped sharply in the course of 2022 and, in the second quarter of 2023, were 62% lower than in the same quarter of the preceding year. As a result, residential construction investment has contracted since the second quarter of 2022. While the strong first quarter ensured positive growth in 2022 as a whole, residential construction investment will fall by 8.4% in 2023. A further decline by 4.5% is expected in 2024, before growth will enter positive territory again in 2025 and 2026.

Other construction investment (nonresidential construction and civil engineering) has been falling steadily since its peak in 2019. Up to and including 2023, it has decreased by 14%. We expect only a slight recovery over the forecast horizon.

After falling by 2.7% in 2023, total gross fixed capital formation is expected to stagnate in 2024 (–0.2%) and to grow only mildly in the subsequent two years.

Box 1

Unemployment rises and wage growth remains high

Growth in total employment (payroll employees and self-employed persons) will slow down from 0.9% in 2023 to 0.5% in 2024. As the economy recovers, annual growth in total employment will accelerate to 1% in both 2025 and 2026, which corresponds to the long-term average. Growth in hours worked has been surprisingly robust in 2023, at 1.0%. Over the forecast horizon (2023–2026), it will come down to 0.7% on average.

Labor supply, which grew relatively strongly in 2022 and 2023, in part due to migration, is expected to moderate slightly over the forecast horizon (chart 1). Austria’s labor force will stagnate in 2024 and shrink slightly in 2025. The participation rate will increase marginally from 2024, mainly because the statutory retirement age for women will be gradually raised from this year on. The integration of Ukrainian refugees into the Austrian labor market has resulted in an additional 18,000 people joining the Austrian labor force.

Chart 1

The unemployment rate as defined by the AMS has risen from 6.3% to 6.5% in 2023 (according to Eurostat’s definition: from 4.8% to 5.3%). It will continue to increase in 2024 (AMS definition: 6.8%; Eurostat definition: 5.5%) and fall again in the following two years as economic growth picks up.

In 2023, collectively agreed wages will increase by 7.6%. For 2024, we also expect an increase by 7.6%. In 2025 and 2026, the swift decline in the inflation rate typically used for collective bargaining (12-month rolling average) will lead to a significant decline in the growth of collectively agreed wages. Nominal gross wages per employee will grow at a rate similar to that observed for collectively agreed wages, with a slightly positive wage drift on average for the period from 2023 to 2026.

Gross real wages per employee (deflated by the HICP) will hardly increase in 2023 (+0.2%), following a pronounced decline in 2022. Net real wages, by contrast, will go up by 0.8% in 2023. We expect gross and net real wages to rise significantly in 2024 and 2025. In gross terms, real wages will increase by 3.5% in 2024 and by 1.5% in 2025. In net terms, real wage increases will even turn out somewhat stronger. The wage share of GDP will we about 3 percentage points higher in 2026 than in 2019.

Private consumption fuels upswing in 2024

Real disposable household income rose strongly in 2022 (+3.1%) despite rising inflation and moderate wage agreements. Next to vigorous employment growth and a strong increase in self-employment and investment income, this rise is attributable to government transfers like the “climate bonus” (including inflation relief payment). For 2023, we see a strong movement in the opposite direction, as the climate bonus has been paid out in the (lower) amount as originally planned and self-employment and investment income have been declining; as a result, real disposable household income will decrease by 2.8%.

Private consumption expanded strongly in the first half of 2022 as the remaining pandemic-related restrictions were lifted. However, as inflation accelerated and uncertainty increased as a result of the war in Ukraine, real consumption again started to decline in the second half of 2022 and continued to do so until the third quarter of 2023, with the exception of the first quarter of 2023. For 2023 as a whole, real consumption is expected to contract by 0.4%; given the sharp drop in household income, this contraction is comparatively mild, which can only be achieved through a falling saving ratio.

Chart 2

On the basis of the wage bargaining agreements that have been signed to date, collectively agreed wages are expected to grow by 7.6% in 2024. As bracket creep has been eliminated, the growth of net nominal wages per employee, at 8.6%, will be significantly higher than the growth of collectively agreed wages. The net real wage increase per employee will come to 4.5% in view of falling inflation, which represents the strongest increase since 1995, when these data were first collected. In addition to real wage increases, the lagged compensation for inflation in government transfers (mainly pensions) will also support household income in 2024. Overall, real net disposable household incomes will grow by 3.8%. Growth will slow in 2025 (+2.6%) and 2026 (+1.3%) but remain above average. This will enable households to increase their saving ratio, which is expected to fall to 6.4% in 2023 as savings have been used to cushion real income losses. Despite a rising saving ratio, consumption will grow strongly in 2024, but year-on-year growth will reach only 1.5% due to the low level observed in 2023. Expanding at 1.8% and 1.2%, respectively, private consumption will continue to make a significant contribution to GDP growth in 2025 and 2026.

HICP inflation at 7.7% in 2023 – by 2026 the inflation target of 2% should be increasingly within reach

In 2023, the main drivers of persistently high inflation have included the lagged pass-through of lower wholesale household energy prices to end consumers as well as strong services and food price inflation. As these factors are gradually becoming less important, the OeNB expects inflation as measured by the HICP to fall from 7.7% in 2023 to 4.0% in 2024 and 3.0% in 2025. In 2026, the inflation rate will reach 2.4%, coming closer to the ECB’s target of 2% again. Unlike HICP headline inflation, core inflation (which excludes energy and food) will continue to rise in 2023 to reach 7.2%, reflecting large wage increases, especially in the wage-intensive services sector, and will come down more slowly in 2024, to 4.5%.

Based on HICP inflation of 8.6% in 2022, the OeNB expects inflation to decline slightly to 7.7% in 2023. This expected decline is mainly driven by a lower – and in some months even negative – contribution from energy (brown bars in chart 3). All other components (food, industrial goods excluding energy and services) are recording a higher inflation rate in 2023 than in the previous year, replacing energy as the main drivers of inflation. However, inflation rates for industrial goods (dark blue bars) and food (green bars) have already shown a marked decline over the course of the year, which will continue in the following years.

Chart 3

The futures prices for crude oil underlying this outlook will continue to decline until the end of 2026. On international wholesale markets, electricity prices have halved in 2023 compared to 2022, and gas prices have been reduced to a third. The pass-through of lower wholesale prices to end customers is slow in Austria, partly due to the relatively long contractual lock-in periods. As a result, the drops in household energy prices are only visible in energy inflation in the second half of 2023 and will continue into the first half of 2024. Similarly, government anti-inflationary measures (in particular the electricity price cap and the subsidization of network loss charges) have a dampening effect on inflation. According to OeNB calculations, the direct downward impact of fiscal policy measures on HICP inflation in 2023 amounts to around 1 percentage point.

As of mid-2024, the phasing-out of anti-inflationary measures will exert upward pressure on inflation. However, due to the fact that electricity prices are now lower, these effects are significantly lower than when the measures were introduced. The OeNB’s forecast assumes that overall energy prices will continue to fall in the second half of 2024 because of competitive pressure following the end of the electricity price cap, as well as the renewal, on more favorable terms, of the large number of household energy contracts concluded in the second half of 2023.

The high level of food price inflation in the first half of 2023 has already eased significantly over the course of the year. The decline in agricultural commodity prices and energy prices should lead to a further marked easing of the pressure on end consumer prices. Food inflation is expected to decline steadily to 2% in 2026. This means that in 2026, inflation in this sector will be below the long-term average of the period from 1999 to 2019 (2.2%).

Core inflation, which excludes energy and food, is expected to increase to 7.2% in 2023 (2022: 5.1%). The main reason for this is the sharp rise in wage costs due to lagged inflation compensation, which is particularly evident in the services sector. The OeNB expects high wage agreements for the years to come, too. As a result, price pressures in the services sector will remain persistently high. The rent cap and the suspension of increases in municipal utilities fees from 2024 will contribute to a slight easing of services inflation. The second component of core inflation, nonenergy industrial goods, will fall significantly in 2024. However, as their weight in the core inflation rate is significantly smaller than that of services, the core inflation rate will only fall slowly. Moreover, it will remain above HICP inflation from 2024.

As energy and food inflation in the second half of 2023 was higher than expected in June, the current forecast for 2023 has been revised upward (table 6). The assessment for 2024 and 2025 remains largely constant. The markedly lower core inflation rate in 2024 is the result of lower economic growth, which is also visible in prices.

Box 2

Budget deficit falls below Maastricht threshold but remains above pre-crisis levels

For the current year, a budget balance of about –2.6% is expected, the smallest deficit since 2020 (–8.0%). This is a clear improvement compared to the year 2022 (–3.5%). Over the forecast horizon, we expect the Maastricht deficit to slightly worsen compared to 2023 (2024: –2.7%; 2025 and 2026: –2.8%).

Chart 4 shows the budget balance, including the most important discretionary determinants. The contraction in the deficit in 2023 is markedly driven by the strong reduction of the remaining COVID-19 measures (like testing and corporate subsidies). While, in 2022, these measures had still increased the deficit by more than 1% of GDP, they will contribute less than 0.3 percentage points from 2023 (chart 4, blue). At the same time, the costs for energy measures are starting to decrease slightly in 2023 but remain one of the main determinants of the budget balance (pink).

Chart 4

Compared to the OeNB’s June outlook, the estimated cost of energy-related support measures has been revised downward. This is partly due to lower energy prices, which are reducing spending on the electricity price cap and energy subsidies for businesses. These support measures are expected to be swiftly phased out over the forecast horizon.

A lasting effect on the budget balance will come from the wage and income tax reforms (cut in the lowest rate of personal income tax, eco-social tax reform and, later, the elimination of bracket creep), which in part have already been in effect since 2020. While strong growth on the revenue side (especially from value-added tax and, for 2023, also from capital gains tax) and below-average interest payments still had a positive impact on public finances in 2022 and 2023, these factors will weaken significantly over the forecast horizon due to the subdued economy and the changed interest rate environment. Together with recently announced expenditure increases under the new fiscal sharing regime and inflation-related strong increases in public sector wages and pensions, this poses major budgetary challenges from 2024. These developments are also reflected in the debt ratio (chart 5). In 2023, the improved budget balance, coupled with high inflation, will cause the debt ratio to drop visibly, by 1.8 percentage points to 76.6% of GDP. In the years 2024 to 2026, improvements in the debt ratio will only be small. This is due to persistently high primary deficits, increasing interest payments and weak nominal GDP growth.

Chart 5

Annex of tables