OECD Economic Outlook, Volume 2023 Issue 1

Austria

Economic activity is projected to slowly recover from the current downturn, with GDP rising by 0.2% in 2023 and 1.6% in 2024, supported by stronger domestic demand. Headline inflation will gradually decrease and rising real wages will support household incomes from the second half of 2023. Tight labour market conditions will loosen slightly over the projection period, bringing a small increase in unemployment. Business investment will be damped by elevated interest rates and labour costs.

The fiscal stance will tighten over the projection period with the phasing out of pandemic‑related support in 2023 and of anti-inflation measures in 2024. Some of these measures will be substituted by welcome structural fiscal changes aimed at lifting growth by reducing labour costs. Other temporary measures compensating for high energy prices that are still in place over the next two years need to be better targeted to avoid weakening price signals and to reduce inflation pressures. Activating existing labour reserves would help remedy persistent labour shortages.

Economic growth has slowed

A contraction of 0.1% in the fourth quarter of 2022 was reversed in the first quarter of 2023. High‑frequency indicators suggest that output growth will remain weak until the second half of 2023. High inflation is weighing on private consumption. Elevated uncertainty and tighter financial conditions have slowed private investment. Headline inflation fell over the first quarter to 9.5% in April 2023. However, core inflation continued to rise, predominantly driven by services sectors. Labour market conditions are tight but have started to cool with the unemployment rate increasing slightly from a low level and the job vacancy rate trending down since the third quarter of 2022.

Austria: Inflation and labour market indicators

1. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

2. The job vacancy rate is the number of vacancies divided by the number of occupied posts plus the number of vacancies.

Source: OECD Main Economic Indicators database; and Eurostat.

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Austria: Demand, output and prices

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The Austrian economy is vulnerable to a further tightening of financial conditions. Higher interest rates are passing quickly through to corporations and households due to a prevalence of variable‑interest loans. Evidence of this is seen in the housing sector: new lending for residential construction halved in the second half of 2022, and real estate prices have started falling. Austria remains vulnerable to additional disruptions in gas supply even though the country has reduced its dependence on Russian gas imports and gas reserves stood at 72% of average annual consumption as of early May 2023.

Fiscal support will steadily decline

The budget deficit is expected to narrow over the projection period from 3.2% to 1.6% of GDP. A large part of crises-related support, including most expenditure items which amounted to 3.9% of GDP in 2022, will be phased out. Meanwhile, income taxes will be reduced and interest expenditure is set to rise. The remaining pandemic-related expenses, amounting to around 1.7% of GDP in 2022, will continue to be phased out over the next two years. Discretionary fiscal support against high inflation represented around 1.5% of GDP in 2022. Much of this support will continue throughout 2023 and partly into 2024, in particular, through an electricity‑price brake. The fiscal effect of these measures will be partially substituted by structural measures including the inflation indexation of tax brackets and the eco‑social tax reform. The latter will increase the deficit by 0.5 percentage point of annual GDP between 2022 and 2024. Higher revenues from carbon pricing will contribute to reductions in income taxes and income support via the regional climate bonus for households. Grants from the European Recovery and Resilience Facility will finance investment in renewable energy and digitalisation for 0.2% of GDP per year in 2022‑2024.

The economy will gradually expand

Output will recover gradually and grow by 0.2% in 2023 and 1.6% in 2024. High inflation, tighter financial conditions, and the withdrawal of pandemic-related expenditures will weigh on domestic demand during 2023 while weaker growth in trading partners will damp export growth. The tight labour market will loosen only gradually, with a small increase in unemployment. Higher nominal wages and a decrease in inflation will support private consumption in 2024. Higher interest rates will weigh on investment in 2023 but growth will resume in 2024. Inflation has peaked and will steadily decrease, but will remain high over the projection driven by stickier inflation in core services. Risks to the projections are skewed to the downside. As a small open economy, Austria is particularly susceptible in the event of weakening global demand or further supply disruptions.

Structural reforms could support sustainable and inclusive growth

Reducing regulatory barriers in certain service sectors that have been sheltered from competition, and pursuing efforts on digitalisation, could strengthen productivity. Broadening access to labour markets and reducing skill shortages would also support inclusive growth. Improving the availability and quality of early child and elderly care services, and encouraging a balanced use of parental leave, would address the low full-time employment of women. Better incentives to continue working at an older age and ensuring good working conditions would support the employment of older workers. Pursuing the reduction in labour tax wedges included in the support measures against high inflation and the eco‑social tax reform would help raise the employment of low‑skilled workers. Support measures to mitigate the impact of high inflation need to be better targeted to preserve incentives to lower energy use, and ensure fiscal sustainability in light of rising future long-term spending pressures related to ageing and climate change.