OECD Economic Outlook, Volume 2024 Issue 1

Austria

Growth will gradually pick up to 0.2% in 2024 and 1.5% in 2025, following a contraction of 0.7% in 2023. While private consumption will gather strength with rising real wages, investment will remain weak because of high borrowing costs and rising labour costs. Unemployment is set to rise somewhat in 2024. Inflation will decrease steadily but remain above 2%. Further easing of the labour market is possible given extensive labour hoarding, and weak external demand or high cost pass-through could diminish exports.

The fiscal deficit will remain broadly constant over the projection period. The phasing out of crises-related support will be offset by increasing public wages and social benefits, and new discretionary measures. Keeping the public deficit stable in the short term is appropriate while demand is weak, but stronger consolidation is needed over the medium term to contain interest payments and public debt. Easing regulatory burdens on services and activating underrepresented groups in the labour market, including women and older cohorts, would strengthen the economy’s resilience.

Economic activity has reached a trough

The economy contracted in 2023, but high‑frequency indicators suggest that activity has bottomed out. High prices weighed on consumption, but wages are catching up. Consumer confidence is picking up. However, tight financial conditions and weak demand are still hampering investment. External demand was subdued, although exports of intermediate goods picked up in the last quarter. Inflation fell to 4.1% in March thanks to lower energy prices but remains among the highest in Europe. The unemployment rate is low, but the labour market has started to ease, especially in manufacturing.

Austria: Labour market and activity indicators

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

Source: OECD Economic Outlook 115 database; and EU harmonised business surveys.

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Austria: Demand, output and prices

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The slowdown in global merchandise trade and weakness of economic activity in Europe, particularly Germany, which is the destination for more than 30% of Austrian exports, have hampered export growth. Still, Austria’s volumes of goods exports have performed better than other euro area countries helped by lower relative exposure to China, a specialisation in specific niches of the machinery and vehicle industry, and lower profit margins set by exporters.

The public deficit will remain high

High interest rates are still passing through into borrowing costs, weighing on investment and activity, particularly in the construction sector. An increase in perceived corporate risk and a fall in collateral values have contributed to a slowdown in bank credit to companies. Demand for housing loans has weakened since the second half of 2022. The public deficit is expected to stabilise at 2.8% of GDP in 2024 and 2.7% in 2025, with a mild tightening of the fiscal stance. Lower crises-related support is offset by new discretionary spending and cost increases due to inflation. On the expenditure side, pandemic-related outlays (0.4% of GDP in 2023) are effectively phased out in 2024. The energy price subsidy for companies will also be withdrawn in 2024, and the electricity price brake for households in 2025. In parallel, social benefits and public labour compensation will increase, reflecting past inflation. Additional discretionary expenditures are expected, including from a new financial equalisation agreement. On the revenue side, tax revenues will benefit from the pick-up in consumption, higher nominal wages and relatively stable employment. Increased carbon pricing will also boost revenues, but the introduction of indexation of tax brackets to inflation and a scheduled reduction in tax rates will constrain income tax revenues. Maintaining a stable public deficit in the short term while demand is weak is appropriate, but a stronger medium-term plan is needed to reduce the deficit and the debt level as the economy picks up.

The economy will recover only slowly

Output growth will gradually recover to 0.2% in 2024 and 1.5% in 2025, as disinflation continues and interest rates start declining. Private consumption will gain traction in 2024 due mostly to higher real wages, reflecting the pass-through of past inflation into wages. Private investment will remain restrained by tight financial conditions and higher labour costs. The labour market will loosen in 2024, with unemployment projected to increase to 5.5% in 2024. An easing of monetary policy and the global recovery will help bring GDP growth above potential in 2025. Disinflation will be slowed by sticky inflation in core services. Risks to the projections are skewed to the downside. Low levels of hours worked suggest that the extent of labour hoarding is potentially high. Austria is susceptible to a further slowdown in global trade. In addition, the pass-through of domestic costs to export prices may accelerate, damping competitiveness.

Structural reforms are needed to make the economy resilient

Capacity to adapt to future shocks and address structural challenges needs to rise. Easing entry requirements into certain professional services could help revive business dynamism. Expanding high-quality preschool education facilities and further strengthening incentives for more balanced use of parental leave between mothers and fathers would raise employment rates. Labour force participation would also be promoted by shifting taxation from labour to other bases, including carbon and property taxation. These measures, along with the containment of aging-related spending via increased retirement ages and a shift of health services from hospital to primary care, would support the long-run sustainability of public finances.