Austria's Economy: Recession Or Growth?

Austria was one of the few countries in the Eurozone to emerge relatively unscathed from the 2007 financial crisis. However, in recent years, it has lost ground to comparable countries such as Switzerland and Germany. While Austria still ranks highly on GDP per capita (PPP), it risks falling behind if it does not increase spending on research and development to compensate for its shrinking working-age population.

The country's economy has stagnated in the years following the Great Recession of 2009, with GDP rising by only 0.2 to 0.3% in 2013 and 2014. As of December 2022, OECD recession indicators for Austria show a value of 0, indicating an expansionary period. However, it is worth noting that these indicators are not seasonally adjusted and are based on interpretation.

Unemployment

Austria's unemployment rate stood at 6.3% in 2022, according to national calculations. This is a significant decrease from the previous year, with an average of 263,121 people registered as unemployed with the Public Employment Service Austria (AMS). The average unemployment rate for young people up to 25 years of age was 5.4%, while for those aged 55 and above, it was 8.5%. The unemployment rate for foreign nationals was significantly higher at 9.1%, compared to the Austrian average.

Looking ahead, an increase in the number of people registered as unemployed is expected in 2023, with a projected registered unemployment rate of 6.9%. This rise can be attributed to various factors, including high energy costs, rising inflation, and subdued domestic and international demand.

The labour market in 2022 was characterised by a sharp increase in companies' demand for staff, particularly in the accommodation and catering sector, which experienced a rapid recovery from the COVID-19 pandemic. However, the overall economic growth in 2023 is expected to be meagre, with a projected GDP growth of just 0.3%.

To maintain its economic position, Austria needs to address issues such as a stubbornly high inflation rate and a rising tax burden, which have contributed to the slowdown. Additionally, increasing research and development spending is crucial to compensate for the negative impact of a shrinking working-age population on economic growth.

Economic growth

Austria's economic growth has been relatively strong in recent years, but there are signs that it is slowing down. The country's GDP per capita is the second highest in the European Union, and it was one of the few countries in the Eurozone to emerge from the financial crisis relatively unscathed. However, Austria has lost ground to comparable countries such as Switzerland and Germany in recent years. The slowdown is due to both external and domestic reasons, including a stubbornly high inflation rate, a rising tax burden, and disappointing export performance.

To maintain its current economic position, Austria needs to increase spending on research and development to compensate for the negative effect of a shrinking working-age population on economic growth. The country's potential GDP growth has declined in recent years due to rising structural unemployment, decreasing working hours, low or negative investment, and slowing total factor productivity growth.

Austrian business cycle theory argues that economic expansions are sustainable only if they are funded by an increase in investment and saving, rather than credit expansion. When credit creation exceeds a society's structural saving rate, it leads to distorted market prices, affecting entrepreneurial decisions and causing a misallocation of capital. This can result in producing too many capital goods and not enough consumer goods relative to consumer preferences. Eventually, as the lack of underlying demand becomes apparent, production capacity is idled, and the boom turns to bust.

The recent global financial crisis has been attributed to credit expansion and easy monetary policy by central banks, particularly the US Federal Reserve. Low-interest rates encouraged excessive risk-taking and financial leverage by intermediaries, leading to unsustainable asset price bubbles. The crisis was triggered by a collapse in the real estate market, which caused a broader downturn in the financial markets and the economy.

Private consumption

However, there are some signs of improvement in private consumption. Strong wage growth of almost 8% year-on-year in 2023 and a further increase of 8% in the first nine months of 2024 indicate a potential improvement in consumers' spending mood. The sharp rise in nominal wages is gradually translating into real wage growth, which is expected to positively impact consumers' purchasing power.

In the third quarter of 2024, private consumption rose by 0.5% quarter-on-quarter, marking a slight recovery. However, it is important to note that this growth is coming from low levels and does not yet indicate a clear turning point. Leading indicators suggest that private consumption is set to overcome its prolonged weakness as uncertainties recede and inflationary pressures subside.

The recovery in private consumption is expected to be supported by the overall economic growth projected for 2025. As the global economy improves, exports are expected to pick up, driving domestic demand and contributing positively to private consumption. However, it is worth mentioning that the recovery in private consumption is fragile, and a prolonged recession or continued economic stagnation could impact consumers' spending power and prolong the weakness in private consumption.

Exports

Austria's exports are heavily dependent on the performance of key trading partners, particularly Germany and Italy. The slowdown in these economies has contributed to the decline in Austrian exports. Additionally, Austrian companies have struggled to compete with companies from countries like Germany and Switzerland, which have performed better in recent years.

To improve export performance, Austria should consider diversifying its export markets. Currently, Austrian companies rely heavily on Italy and Eastern European countries, which have not been performing well. By expanding into new markets, Austrian companies can access new sources of demand and reduce their vulnerability to economic downturns in specific regions.

Additionally, the high tax burden on labour in Austria is problematic, especially since Germany, its most important trading partner, has curbed its labour costs. This makes it challenging for Austrian companies to compete with German companies, particularly in industries like car manufacturing, where there is a risk that German companies will substitute imports from Austria with their own production.

To enhance export competitiveness, Austria should address the high tax burden on labour and create a more favourable business environment. This could include reducing taxes and simplifying regulations to attract more foreign investment and encourage domestic companies to increase their exports.

Interest rates

High interest rates, along with high energy costs, have been a significant factor in the country's economic recession, particularly in the construction sector and industry. Construction of dwellings declined by 18% in 2023 and 2024.

However, in 2025, the Austrian economy is expected to recover, with GDP growth projected to pick up to 1%. This recovery is forecast to be aided by monetary easing and a housing construction stimulus package.

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