Leslie Massey
Austria's economy has been affected by persistently high inflation, which has had a negative impact on its competitiveness. While other eurozone countries have seen significant declines in headline inflation, Austria's downward trend has been sluggish, reducing its attractiveness for industry and tourism. Inflation in the services sector, including the tourism industry, has been amplified by wage increases, with wages in the Austrian accommodation and food services sector increasing by 28% between the fourth quarter of 2019 and the first quarter of 2023. This has resulted in a loss of competitiveness in the manufacturing and export sectors, as well as affecting private consumption due to high price levels. The Austrian government's budget plans for 2024 aim to address the fiscal deficit, with higher interest costs and expenses related to high past inflation.
| Characteristics | Values |
|---|---|
| Recession | Yes, projected to be the second consecutive year of recession in 2024 |
| GDP | Expected to decline by 0.6% in 2024 |
| Inflation | Decreased from 7.7% in 2023 to 1.8% in September 2024 |
| Wages | Expected to increase by 7.5% in 2024 and 3.8% in 2025 |
| Unemployment rate | Expected to increase from 5.1% in 2023 to 5.3% in 2024-2025 |
| Exports | Weak, with lower goods exports to Germany |
| Private consumption | Close to zero despite increasing real wages |
| Industrial growth | Weak |
| Corporate investment | Low |
| Construction | Declined by 18% in 2023 and 2024 |
| Social security system | Strong, with social expenditure at roughly 29.4% of GDP |
| Labour force | 72% engaged in the service sector |
| Natural resources | Iron ore, non-ferrous metals, important minerals and earths, petroleum, and natural gas |
| Electricity-generating industry | Leader in the field of hydroelectric power in the EU |
| Business establishment | No principal limitation on establishing and owning a business in Austria |
Explore related products
What You'll Learn
Energy prices
The average electricity price in Austria is currently around €0.33 per kWh. However, prices vary depending on consumption levels and household size. Smaller households with low consumption pay approximately €0.46/kWh, most consumers pay €0.36/kWh, and larger households or energy-intensive users pay €0.30/kWh.
There are several reasons for the increase in energy prices in Austria over the past year. One factor is the need for electricity providers to recover past procurement costs. In 2022, electricity prices in Austria reached a record high of around €489.5 per megawatt-hour due to an energy supply shortage across Europe, which was further exacerbated by the Russia-Ukraine conflict. Additionally, increased CO₂ pricing and higher network charges have contributed to the rising energy prices. The price of emitting CO₂ has risen from €32.50 per tonne to €45 per tonne in 2024, making electricity generation from fossil fuels more expensive.
Moreover, ongoing gas supply issues from Russia have impacted energy prices in Austria. Gas consumption has decreased since 2021, dropping by 14% to 7 bcm in 2023. The industry has been the largest consumer of natural gas, followed by power plants and the residential tertiary sector. In terms of electricity consumption, there has been a 3% annual decrease since 2021, with a total consumption of 63 TWh in 2023. Oil consumption has also decreased by 3.4% per year since 2019, reaching its lowest level since 1990 in 2023.
Postal Codes: Navigating Salzburg, Austria
You may want to see also
Explore related products
$17.88
Inflation
High inflation in Austria has had a detrimental impact on consumer confidence, leading to an increased saving rate. Additionally, high interest rates and energy costs have weighed heavily on investment, particularly in the construction sector, with a notable decline in the construction of dwellings. The industrial sector has also been affected, with increases in unit labour costs above the EU average, resulting in a decline in Austria's price competitiveness and lower goods exports.
To combat the negative consequences of inflation, the Austrian government has implemented various measures. These include extending initiatives to mitigate high energy prices, such as the electricity price brake, until the end of 2024. Additionally, the government has adopted a construction stimulus package, allocating EUR 2.5 billion to promote social housing projects. While this stimulus is expected to take time to implement due to the longer planning period, it should contribute to the recovery of the construction sector in the latter half of 2025.
Wage increases across various industries in Austria have been negotiated to keep pace with inflation. For example, workers in the metal industry will receive a 4.3% increase in gross wages in 2025, corresponding to the rolling inflation rate of 3.8% plus an additional 0.5%. Similarly, employees in the railroad sector have agreed to a 4.1% increase in collective agreements and actual salaries, while postal workers will receive a 6.45% increase in salaries, bonuses, and apprentices' incomes from January 2025.
Looking ahead, Austria's inflation rate is expected to continue its downward trend, with forecasts predicting a further decline in 2025 and 2026. This easing of inflation is projected to contribute to the recovery of private consumption, as consumer confidence gradually restores. Additionally, the adjustment of income tax thresholds upwards in 2025 will allow for higher net wages, further supporting economic growth. However, it is important to note that uncertainties, such as the reliance on Russian gas deliveries, may impact production and economic stabilisation in the coming year.
The Austrian Red-White-Red Card Explained
You may want to see also
Explore related products
Labour costs
Firstly, high inflation in Austria has impacted labour costs. Between 2019 and 2024, the inflation rate averaged 4.7%, with a peak of over 8% in 2022 due to supply chain disruptions and geopolitical tensions. This led to a decline in purchasing power, affecting both businesses and households. In response, nominal wages are projected to increase by 7.5% in 2024 and 3.8% in 2025, according to forecasts. These wage adjustments aim to mitigate the impact of high inflation on purchasing power.
Secondly, the delay in wage adjustments during the high inflation period contributed to labour cost fluctuations. In 2023, sectors such as catering and insurance experienced a slump as wages failed to keep up with rising prices. This lag in wage adjustments further exacerbated the impact of high inflation on purchasing power and labour costs.
Additionally, Austria has a strong labour movement culture, which influences labour politics and policies. Labour movements have played a significant role in shaping labour laws, wages, and working conditions. The strength of labour movements in Austria has likely contributed to wage adjustments and negotiations, particularly in industries with strong union representation.
Moreover, the prolonged recession in Austria has moderately impacted the labour market. While the unemployment rate is expected to increase from 5.1% in 2023 to 5.3% in 2024, labour supply is still growing due to migration and the alignment of women's retirement age with men's. This dynamic between unemployment and labour supply can influence labour costs as employers may face wage pressures to attract and retain talent in a tightening labour market.
In summary, labour costs in Austria have been shaped by high inflation, delayed wage adjustments, the strength of labour movements, and the country's economic recession. The interplay between these factors has resulted in fluctuations in labour costs, with wage adjustments playing a pivotal role in mitigating the impact of inflation on purchasing power.
Austrian Airlines: Best Seats for a Comfortable Flight
You may want to see also
Explore related products
Cost of living
The cost of living in Austria has been impacted by several factors in the past year. Firstly, high inflation has eroded consumer confidence, leading to a significant increase in the saving rate. While inflation eased towards the end of 2023, it averaged 4.7% in the last 5 years up to the end of 2024, with a rate of 3% for the year. This has been influenced by global crises, such as the COVID-19 pandemic, supply chain disruptions, and geopolitical tensions, which caused a sharp increase in energy prices of over 50% at the monthly peak. The increase in energy costs has had a significant impact on the construction sector, with construction of dwellings declining by 18% in 2023 and 2024. High interest rates and energy costs continue to affect investment in this sector.
In addition to inflation, the cost of living in Austria has been influenced by the country's labour market dynamics. Nominal wages are expected to increase by 7.5% in 2024, driven by past inflation and the indexation of important expenditure positions such as public salaries, pensions, and social benefits. However, the prolonged recession in Austria has moderately affected the labour market, with an expected unemployment rate increase from 5.1% in 2023 to 5.3% in 2024. The increase in the unemployment rate is mitigated by a larger cohort reaching retirement age and a moderate increase in the labour supply due to migration and the alignment of women's retirement age with men's.
The Austrian government's fiscal stance and expenditure have also played a role in the cost of living. The government deficit is projected to rise to 3.7% of GDP in 2025 due to increased spending on pensions and social benefits. Measures to mitigate high energy prices, such as the electricity price brake, have been extended, and the climate bonus, a lump-sum compensation for the CO2 emissions price, has increased. At the same time, tax revenues are projected to grow more moderately, and VAT increased to 20% in 2023, impacting prices.
Despite the challenges, Austria has a highly developed social market economy and is one of the fourteen richest countries in the world in terms of GDP per capita. International tourism is a critical part of the national economy, and Vienna is ranked as the fifth-richest NUTS-2 region within Europe.
Austria: Country or German Territory?
You may want to see also
Explore related products
Government deficit
The Austrian economy has been in recession for the past year, with declining investment, lower exports, and weak private consumption. The government deficit in Austria has been attributed to several factors, including the indexation of expenditure on public salaries, pensions, and social benefits to inflation. Additionally, the country has seen increased spending on childcare, health and long-term care, housing, and climate action. The increase in the climate bonus, a lump-sum compensation for the recently introduced CO2 emissions price, has also contributed to the deficit.
Austria's budget deficit in 2024 was 4.7% of its GDP, exceeding the European Union's limit of 3% and the predicted 4%. This has led the new coalition government to pledge to reduce the deficit by adhering to existing savings plans, with promised savings of more than 6 billion euros ($6.5 billion) for the year. However, the decision to not immediately seek additional savings indicates the government's willingness to undergo an excessive deficit procedure, which could potentially result in a fine.
The Austrian government's high expenditure is driven by several factors, including the need to mitigate the impact of high energy prices and the electricity price brake, which has been extended until the end of the year. Furthermore, the government has had to address the effects of the pandemic, the energy price shock, and the rise in interest rates to curb inflation. The inflationary shock has resulted in declining real wages and a slump in investment, causing a 1% decrease in GDP in 2023 and a projected decline of 0.6% in 2024.
The Austrian government's deficit is also influenced by rising structural fiscal costs related to aging, defense spending, and necessary investments in digitalization and the green transition. These costs could increase public expenditure by 3-4% of GDP by 2030 if not addressed with offsetting measures. The authorities are encouraged to implement substantial fiscal adjustment measures to reduce the fiscal deficit and put the public debt ratio on a downward trajectory. Suggested measures include reducing subsidies and tax expenditures, updating property tax valuations, and pension reforms.
Austria's Territorial Gains from Hungary in the 1920s
You may want to see also
Frequently asked questions
Austria's industrial and commercial sectors are characterised by a high proportion of medium-sized companies. The constant growth of the industrial sector requires supplementary imports, including raw materials and energy resources. High energy costs, driven by the impact of the climate bonus, have contributed to rising costs.
Inflation has had a significant impact on the Austrian economy, eroding consumer confidence and leading to a higher saving rate. While inflation has decreased from 7.7% in 2023 to 1.8% in September 2024, it continues to affect purchasing power and investment.
Nominal wages are expected to increase by 7.5% in 2024 and 3.8% in 2025, driven by past inflation. Specific industries, such as railroad workers, postal workers, and the metal industry, have negotiated wage increases ranging from 4.1% to 6.45%.
The Austrian economy is projected to face a second consecutive year of recession in 2024, with declining investment, lower exports, and weak private consumption. However, growth is expected to resume in 2025, driven by exports and a recovery in private consumption as inflation subsides.
