OeNB Report 2024/22: Growth outlook constrained by weak industrial activity and sluggish private consumption

Economic outlook for Austria for 2024 to 2027 (December 2024)

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

The Austrian economy is currently in a difficult situation, with industrial production facing a wide range of challenges. Exposed sectors have suffered from the consequences of weak international economic activity, structural change in the European automotive industry and high energy and wage costs; as a result, exports declined in 2024. Investment has been slow due to the increase in financing costs and negative sales expectations. Investment in residential construction, contracting already for two years in a row, has been additionally affected by the end of the housing construction cycle.

At the same time, uncertainty among consumers is still very high, driving down private consumption despite strong increases in real wages, while the saving ratio has been rising sharply. As a result, real GDP will decline for two years in a row in 2024, by 0.9%, after –0.8% in 2023. Economic indicators suggest that the economy has not quite bottomed out yet, not showing any signs of an imminent recovery at present. This means that we expect only a modest recovery in 2025, with real GDP growth at 0.8%. The upswing will only gather momentum in 2026 and 2027, as GDP growth will accelerate to 1.6% and 1.3%, respectively.

Despite the weak economic environment, the labor market has remained quite robust. The tight labor market seen in previous years has led firms to keep people employed in 2024. This, in combination with weak labor supply growth due to demographic developments, resulted in the unemployment rate rising relatively moderately. That said, unemployment is expected to rise further in 2025. Only from 2026 on will the economic recovery be robust enough to contribute to a decline in unemployment.

Austrian HICP inflation dropped to 2.9% in 2024, more than halving from 7.7% in 2023. This decline was mostly due to falling energy prices, but also attributable to low inflation for unprocessed food and industrial goods excluding energy. Services inflation remained high in 2024 on the back of vigorous wage growth (5.7%). From 2025 to 2027, inflation will drop markedly, to 2.4%, 2.2% and 2.0%, respectively.

In early 2025, the expiry of energy-related relief measures and rising government fees (which were kept unchanged in 2024) will be the reasons for inflation not falling more sharply. The inflation differential between Austria and the euro area will narrow visibly and disappear altogether by 2027.

The general government budget balance deteriorated to –3.7% of GDP in 2024, from –2.6% in 2023. In 2025, the deficit will expand further, to 4.1%. The reasons for the widening deficit are first and foremost the high increases in pensions and public-sector wages and salaries – because of high inflation in 2023 – and the depressed macroeconomic environment. Moreover, higher expenditure on the green transformation and the shift toward more sustainable transportation systems played a role.

The outlook is based on a no-policy-change assumption, which means we only take into account adopted measures or measures that have already been sufficiently specified. Under the current conditions, this represents a substantial downside risk to the growth outlook for two reasons: First, the European fiscal rules will require that the incoming government undertake substantial consolidation efforts to tackle the high deficits. The amount and specific design of consolidation measures will determine the severity of the resulting negative growth effects. In our consolidation scenario, 2025 to 2027 GDP growth rates will be lower than in this economic outlook: by 0.4 percentage points in 2025 and by 0.3 percentage points in both 2026 and 2027. Second, the import tariffs announced by US President-elect Donald Trump are a risk to the outlook. Model simulations of US tariffs (including retaliatory tariffs) suggest that their effect on Austrian GDP will be between –0.1% and –0.3% in 2025. Inflation would be only marginally higher (by 0.1 percentage points) in this scenario. The medium-term effects of US tariffs are difficult to assess, given the numerous uncertainties (US monetary response compared to the euro area’s, redirection of Chinese excess production to Europe, relocation of production). As regards upward risks to the outlook, a quicker-than-expected decline in the saving ratio to the historical average of 9.5% (2000–2019) would increase annual growth by around 0.2% each year from 2025 to 2027 through stronger consumption dynamics. However, against the backdrop of geopolitical conflicts like the war in Ukraine and the Middle East, the risks to the GDP growth outlook are, overall, clearly tilted to the downside, especially for 2025. The risks to inflation are much smaller by comparison, but mostly tilted to the upside.

1 Weak international economic activity and declining competitiveness weigh on export growth

The conditions for Austria’s exports have remained weak for the second year in a row. While world trade is set to considerably recover already in 2024, growth in Austria’s export markets has been very subdued. In Germany, Austria’s largest trading partner, activity will fall slightly in 2024, stagnate in 2025 and only pick up again in 2026. Similarly, in the euro area as a whole and the remaining EU countries, growth is recovering only gradually. The US economy, by contrast, will continue to grow at a robust pace. The Eurosystem’s forecast expects the US economy to expand by 2.8% in 2024, by 2.2% in 2025, and by 1.8% in both 2026 and 2027. Overall, growth in Austrian export markets will be recovering from 0.8% in 2024 to 2.5% in 2025, and to 3.1% in both 2026 and 2027. Austria’s real exports of goods and services fell by 4.4% year on year in the first three quarters of 2024. For Q4 2024, the OeNB's truck mileage-based export indicator signals a quarter-on-quarter increase of 0.4%.

As a result, in 2024 as a whole, exports are expected to fall by 3.9%. This translates into a 4.7% loss in export market share compared to 2022. The reasons are not only weak external demand, but likely also losses in price competitiveness of 5.3% (compared to 2022). In fact, Austrian unit labor costs rose by 18.3% in total in the past two years, 6.9 percentage points more than in the euro area. For the remaining forecast horizon, we expect Austrian unit labor costs to increase slightly less than in the euro area. The deterioration in price competitiveness vis-à-vis the USA will be cushioned only slightly by a lower (by around 3%) exchange rate of the euro against the US dollar. Austrian firms continue to assess their competitive position inside and outside the EU as very unfavorable. Against this backdrop, we expect a further decrease in market share over the remaining forecast horizon. Real exports of goods and services are forecast to grow by 1.3% in 2025, 2.5% in 2026, and 2.4% in 2027. Austrian exporters are expected to raise their prices slightly more than their competitors over the forecast horizon with a view to offsetting some of the decline in profit margins seen over the past two years.

The significant decline in import-intensive demand components (exports: –3.9%; investment: –2.8%) will also translate into a drop in real imports of goods and services (–3%) in 2024. After that, imports will grow, in proportion to the projected path of demand components, at 2.3% in 2025, 2.6% in 2026, and 2.2% in 2027. Import prices are rising in line with competitors’ import prices. This results in a current account balance of 1.9% of nominal GDP in 2024, 2.0% in 2025, 2.3% in 2026, and 2.5% in 2027.

Uncertainty has been elevated due to the wars in Ukraine and the Middle East and will increase further over the forecast horizon. The biggest risk we have identified is the possibility of a global trade war triggered by the import tariffs US President-elect Donald Trump has announced (see box 1).

2 Ongoing problems in industry hinder investment recovery

Gross fixed capital formation fell by 5.8% overall in 2023 and 2024. While the decline in 2023 was caused by construction investment, in 2024, investment in machinery and equipment was also a contributing factor.

Firms’ investment in machinery and equipment has reflected the industrial sector’s difficult situation. Firms have notably reduced investment because of significantly higher costs following energy price and wage hikes in combination with increased financing costs and weak external demand. The rising number of insolvencies is testament to the difficult situation many firms are currently in. The results of the Austrian bank lending survey (BLS) have shown a decline in demand for corporate loans since the second half of 2022. Banks say this decline is attributable to firms’ dwindling demand for financing for fixed investment. Given the current high geopolitical uncertainties, investment in machinery and equipment is expected to contract somewhat further in the near term, before the modest recovery in external demand assumed in this forecast will lead to a pick-up in investment activity from mid-2025 onward.

Investment in residential construction is the investment component expected to decrease most. As early as in mid-2022, residential construction investment started to go down as a result of increased funding costs, the residential construction cycle coming to an end and weak economic activity. Moreover, building permits have been falling since 2020, signaling the end of a previously pronounced residential construction cycle. The decline accelerated in 2023 and continued in 2024, when residential construction investment was 19% lower than in 2022. Residential construction seems to have reached its trough in mid-2024. In Q3 2024, residential construction investment no longer fell quarter on quarter. At the same time, sentiment in building construction started to improve, with firms assessing both construction activity in the past three months and order books less negatively than a couple of months ago.

The October 2024 bank lending survey indicates a slight pick-up in demand for housing loans in Q3 and Q4 due to a slight fall in interest rates. Hence, we expect a moderate recovery in residential construction from 2025 on. That said, construction investment is expected to remain subdued for the time being, against the backdrop of rising real interest rates due to falling inflation and ample housing supply following years of vibrant construction activity. Nonresidential construction investment also declined in 2023 and 2024, but much less than residential construction investment. Investment in research and development is the investment component with the highest growth rates in the past two decades, and it continued to increase at a very robust pace also in 2024.

Overall, the OeNB expects total investment to shrink further in 2024, by 2.8%, and to recover only moderately – by an average 1.5% p.a. – from 2025 to 2027.

3 Unemployment starts to fall in 2026, wage growth to slow down

The ongoing recession has been the reason for the slow, but continuous increase in unemployment in Austria since early 2023. Even with real economic growth turning slightly positive in 2025, unemployment (national definition) will climb somewhat in 2025 compared to 2024, reaching 7.4% (table 4). A drop in unemployment is only expected for 2026 and 2027, when the jobless rate will be 7.1% and 6.9%, respectively. The unemployment rate according to Eurostat’s definition will also peak in 2025 (at 5.3%), before dropping to 5.0% by the end of the forecast horizon. The number of hours worked will recover slightly in 2025, after a slump by 1.9% in 2024, and is expected to increase by a robust 1.0% in 2026. Similarly, the growth of total employment (in persons), which almost stagnated at +0.1% in 2024, is going to pick up in 2025, reaching its peak at 1.0% in 2026.

The collective wage agreements reached in the past few weeks are signaling a significant decline in negotiated wage growth, from 8.5% in 2024 to 3.4% in 2025. This forecast includes the two-year wage agreement in the metal sectors negotiated in the fall of 2023, with wage and salary hikes by 4.8% (actual wages; minimum wages: 3.8%) from November 2024, and the salary and wage hikes in the public sector (3.5%) and the retail sector (3.3%) that are coming into effect in January 2025. Collectively bargained wages generally continue to follow inflation (with a lag), but both the public and the retail sectors negotiated two-year agreements in 2023 under which wage hikes will be just below the rolling inflation rate in 2025 and somewhat above this level in 2026. Negotiated wage growth will drop to 2.4% by 2027, which roughly corresponds to the long-term average (1995 to 2022). Compensation per employee will be trailing negotiated wages only slightly in 2024. The difference between negotiated wages and actual wages (wage drift) is expected to be more negative in 2025 because of higher unemployment and a decline in hours worked in 2024.

4 Continued consumer restraint in 2024 despite robust real income growth

Austrian households saw their real net incomes increase sharply in 2024. This is mainly due to the lagged rise in wages and pensions after the inflation shock (in 2023, HICP inflation was 7.7%). Moreover, households received high one-off payments (such as the “climate bonus”) to cushion the effects of energy price hikes. Other income, especially property income, has declined. In sum, real net incomes rose by 3.1% in 2024. At the same time, private consumption contracted, which must, at least in part, be considered a consequence of the COVID-19 pandemic. During the pandemic, expenditure on furniture and other furnishings rose sharply, but has been decreasing since then. Real consumption of food services activities dropped in the first half of 2024 (due to the sharp increase in prices in this sector), just as the consumption of transport services. The consumption of total services has also been declining. Rising incomes and falling consumption resulted in a significant increase in the saving ratio. Box 2 takes a closer look at this development.

Real wages and real transfer payments will grow at a lower rate in 2025, following the significant slowdown in inflation in 2024, which will result in real net incomes also rising more slowly. We expect uncertainty to decline over the forecast horizon, given slowing inflation, so that consumption will pick up and the saving ratio will drop. In 2026 and 2027, income growth is expected to be driven by employment growth, while the contributions from real wage growth will be decreasing.

Since we expect consumption growth to accelerate, the decline in the saving ratio will continue. Despite this, at 10.3%, it will still be above the average of the past two decades at the end of the forecast horizon. A decline to the 2000-to-2019 historical average of 9.5% would provide an additional boost to growth (around +0.2 percentage points p.a. from 2025 to 2027), which represents an upside risk to this outlook.

5 Further decline in inflation but temporary uptick in early 2025

The OeNB expects HICP inflation to decline to 2.9% in 2024, from 7.7% in 2023. In the last four months of 2024, the inflation rate will be in line with the ECB’s target of 2.0%. There will be an uptick in inflation in early 2025, however, as the expiry of fiscal support measures will be driving up household energy prices.

This will slow down the decline in inflation, which is forecast to be 2.4% in 2025, before going back to the ECB’s target of 2.0% in 2027. Core inflation (HICP inflation excluding energy and food) will remain above HICP inflation almost throughout the entire forecast horizon but will also drop to 2.0% in 2027. Hence, both headline and core inflation are approaching their long-term averages toward the end of the forecast horizon (1.9% and 2.0%, respectively, from 2011 to 2019). The decline in the inflation rate in 2024 is attributable to all main components of the HICP. Prices of energy products even fell in the second half of the year, and the inflation rates of other categories slowed down significantly. The inflation rate for non-energy industrial goods is now 0.5%, which is lower than the long-term average.

Services inflation has dropped by almost 2 percentage points, to 4.9%, since January 2024, but is still more than twice as high as headline inflation. In the services sector, strong growth in labor costs prevents a steeper decline in the inflation rate.

Fiscal measures have impacted primarily energy and services inflation. In early 2025, HICP inflation will rise by around 0.7 percentage points, driven by the phaseout of fiscal policy measures (electricity price cap), the reinstatement of the electricity and natural gas levy, the reinstatement of the renewables levy, the increase in grid charges and the increase in the CO2 price. ⁵ This will be particularly noticeable in electricity prices, which will rise by more than 35% on average. Gas prices will also increase as a result of fiscal measures, but by less than 10%. This means that the gas price in Austria will still be 2.3 times higher in 2025 than before Russia’s war of aggression against Ukraine. By comparison, the average gas price across the euro area has been 1.6 times the 2021 price for some time. Government fees (including, e.g. parking fees and the price of the public transport “climate ticket”), which were left unchanged in 2024, will increase in 2025, contributing somewhat to higher services inflation.

The OeNB has left its forecast for headline inflation unchanged for 2024 and 2026 but has revised it slightly upward for 2025 (table 6). There will be some shifts in the HICP’s main components in 2025 and 2026. The energy inflation forecast for 2025 was revised upward because of the stronger impact of fiscal measures. For 2026, we revised it downward, as average household energy prices for electricity and gas are expected to fall, not least because households are assumed to become more flexible as regards their electricity suppliers. The upward revision of non-energy industrial goods inflation and the downward revision of food inflation have become necessary because of forecast errors; now both aggregates are already approaching their long-term averages in 2025.

The risks to the inflation forecast are tilted to the upside. Higher-than-anticipated price pressures may emanate from geopolitical tensions, in particular US import tariffs as announced by the incoming US president and retaliatory tariffs by US trading partners (see box 1) as well as Austria’s dependence on Russian gas. A stronger and faster recovery in domestic demand would also stoke inflation.

The annual average inflation differential between Austria and the euro area was 2.3 percentage points in 2023. In the current year, until and including November, it was 0.6 percentage points, which corresponds to its long-term average.

Since October, Austria’s inflation rate has even been below that of the euro area. This decline is mainly attributable to energy and food prices, and the inflation differential in services has narrowed too in the course of the year; still, Austrian services inflation will remain above the euro area level throughout the forecast horizon. The expiry of fiscal measures in Austria will lead to an increase in the energy inflation differential in 2025, as most other euro area countries have already phased out their price-reducing measures in early and mid-2024, respectively. The EU-wide introduction of the Emissions Trading System ETS2, a CO2 pricing system covering fuels and household energy, will result in energy prices rising more strongly in the euro area than in Austria in 2027, as Austria already introduced carbon pricing in 2022. Thanks to this, and falling services inflation, Austria’s inflation rate will be level with euro area inflation in 2027.

6 Public finances: Austria severely breaching Maastricht criteria

The current fiscal forecast indicates a further deterioration in public finances compared to the previous year. For 2024, we expect a general government deficit of 3.7% of GDP (2023: 2.6%), and in 2025, the deficit will reach 4.1%, its highest level since 2021. Toward the end of the forecast horizon, we see a slight improvement, followed by a stabilization at a high 3.6%.

Chart 4 shows the forecast of the budget balance (black line), its contributions (columns) and its change on the previous year (black diamonds). We see that the expiry of a number of discretionary inflation- and energy price-relief measures has a deficit-reducing effect over the entire forecast horizon (blue columns). Interest expenditure (green columns), by contrast, are adding to the deficit during this time. The rise in interest expenditure has two reasons: first, there is the high primary deficit, which means higher new debt and hence interest payments; second, low-yield government debt is maturing and must be refinanced at less favorable conditions. At the moment, we see the inflation shock is having a notable lagged effect on public finances (yellow column). This “price effect” contributed to a decrease in the deficit in 2023, also because pensions were raised by less than the GDP deflator growth rate. In 2024, by contrast, both pensions and public-sector wages and salaries rose by about 9.5%, which is clearly above GDP deflator growth. While revenues have been growing robustly this year, the poor macroeconomic environment will dampen revenues in 2025. Moreover, we will see other effects, especially higher expenditure in the context of the green transition and the shift toward a more sustainable transport system.

The debt ratio also reflects these effects (chart 5): Having stabilized in 2023 against the previous year after its surge during the coronavirus crisis, the debt ratio is expected to rise sharply over the forecast horizon. The OeNB’s current fiscal forecast sees a debt ratio of 82% in 2024, which will climb to just above 84% of GDP by 2027. Like the general government deficit, the debt ratio also reflects the effects of high primary deficits (green columns) and rising interest expenditure (red columns), which GDP growth will be too low to offset ("denominator effect", blue and orange columns).

The OeNB’s forecast is based on a no policy-change assumption and only takes into account policy measures that have already been sufficiently specified.

The budget balance forecast hence is a ceteris paribus scenario. At the moment, both the expected budget balance and the debt ratio are significantly above the Maastricht reference values of –3% and 60%, respectively, over the entire forecast horizon. This implies that in the years to come, there is a need for substantial corrective measures; if such measures were implemented, the deficit would be smaller than we forecast. This is especially true for 2025, which will be particularly difficult from a fiscal perspective, with the deficit likely exceeding 4%. Given that increases in public-sector wages and salaries and pensions have already been agreed for 2025, there is not much short-term leverage left for reducing the deficit. Moreover, budget consolidation in the current difficult economic environment means that there may be substantial negative growth effects (see box 3).

7 Annex of tables