OECD Economic Outlook, Volume 2023 Issue 2

Austria

Economic activity has slowed significantly and is expected to contract by 0.4% in 2023. High inflation is weighing on consumption, rising interest rates and labour shortages are damping investment, and external demand has weakened. Growth will slowly pick up to 0.6% in 2024 and 1.5% in 2025. Higher real wages will support consumption in 2024. Investment will remain subdued because of elevated borrowing costs and rising labour costs, and export demand will be held back due to global macroeconomic tightening. Unemployment will increase slightly.

The fiscal stance will be mildly restrictive in 2023 and 2024. The phasing out of crises-related support is largely offset by new discretionary measures in 2024. Higher borrowing costs and relatively high public debt will require a stronger consolidation by reducing expenditures when growth picks up. Activating existing labour reserves, notably by raising the labour force attachment of women and older cohorts, could support medium-term growth.

The economy will contract in 2023

The economy contracted in the first half of 2023 and high‑frequency indicators suggest that output will remain weak in the second half. Lower real wages, with price inflation pushed up by higher prices for energy, and restaurants and hotels, weigh on consumption. Tighter financial conditions and labour shortages are slowing investment and construction. External demand has also been weak in the second quarter. Inflation fell to 4.9% in October but remains higher than elsewhere in Europe because of less direct intervention on energy prices and the importance of catering and accommodation services. Though the unemployment rate is still at a historically low level, the labour market is starting to ease, especially in manufacturing.

Austria: Inflation and activity indicators

1. The agreed minimum wage index measures changes in minimum wages and salaries determined by collective agreements or legislation.

2. The surveyed firms respond to the question: “What main factors are currently limiting your production?”.

Source: OECD Consumer Prices database; Statistik Austria; and EU harmonised business surveys.

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Austria: Demand, output and prices

Statlink

Private debt is relatively low in Austria, so that the economy is less sensitive than other European countries to the tightening of financial conditions. However, higher interest rates can pass through quickly to indebted corporations and households due to a prevalence of variable‑interest loans. Credit standards have stabilised but demand for business and housing loans has been gradually falling in the last year; and real house prices have fallen faster than elsewhere in the OECD after a steep increase in previous years. As a small open economy, Austria is also exposed to the recent slowdown in global merchandise trade but has benefitted from the post-pandemic pick-up in tourism.

Fiscal support will slowly decline in 2024

The budget deficit is expected to narrow marginally from 2.6% of GDP in 2023 to 2.5% in 2024 and 2025. On the expenditure side, remaining Covid-related expenses have largely been withdrawn. Price-relief measures will mostly expire by mid-2024. These include an electricity price brake for households (0.5% of GDP) expiring in mid-2024 and an energy cost subsidy for corporations (0.6% of GDP) expiring in 2023. However, those reductions will be offset by an increase in social benefits linked to past inflation, by additional discretionary measures to encourage e-mobility and support vulnerable groups, higher interest payments and the outlays induced by the new agreement on fiscal equalisation (0.3% of GDP in 2024). On the revenue side, rising revenues from carbon pricing and the withdrawal of temporary reductions in energy taxes are being offset by reductions in household and corporate income taxation. Robust consumption is supporting indirect tax revenues, though the economic slowdown weakens revenues from income taxes and social contributions. The indexation of tax brackets and social benefits on past inflation aggravates the deficit ratio in 2024. Given low growth, the underlying fiscal stance will tighten by 0.8% of GDP in 2024 and will be mildly expansionary in 2025. The stable deficit combined with high nominal growth leads to a slight increase in the public debt ratio from 78.2% in 2023 to 80.0% in 2025.

The economy will recover only slowly

Output will gradually recover and growth will reach 0.6% in 2024 and 1.5% in 2025, as the supply constraints contributing to inflation phase out and interest rates stop increasing. Household consumption will benefit from an improvement in real disposable income due to receding inflation and higher negotiated wages, which use inflation over the previous 12 months as a reference. Excess savings will be exhausted only at the end of 2025. Tighter financial conditions pass through to business investment in 2024, and the global macroeconomic tightening will damp export growth. The labour market will loosen, with unemployment projected to increase from 4.7% in 2022 to 5.5% in 2024. An easing of monetary policy rates and a global recovery will support growth above potential in 2025. Inflation will steadily decrease but remain high over the projection period, driven by sticky inflation in core services. Risks to the projections are skewed to the downside. The persistence of inflation will depend on the outcome of wage negotiations which began in the fall of 2023. With exports representing more than 50% of GDP, Austria is also susceptible to a further slowdown in global trade and external demand.

Structural reforms are needed for sustainable growth

An ageing population will put gradually more pressure on the public finances. Fiscal costs related to ageing are expected to increase by 1% of GDP by 2030 and potentially 7% by 2060. Fiscal sustainability will require structural reforms of the pension system, such as linking retirement age to life expectancy while ensuring good working conditions at older age. Reforms that raise employment rates would have significant fiscal dividends. Better incentives to continue working at an older age would support employment of the elderly. Improving the quality of early child and elderly care services, and encouraging more men to take parental leave, would help raise full-time employment of women. The ongoing reduction in labour tax wedges will raise employment of low‑skilled workers.