Lexi Webster
Austria's economy has been struggling in recent years, with a decline in prosperity and a drop in GDP. Several factors have contributed to this downturn, including financial tightening, weak global demand, high inflation, and a slump in investment. The country has also been grappling with declining investment, lower exports, and weak private consumption, which have hindered economic activity. The Austrian economy is highly dependent on exports to Germany and Eastern European countries, making it vulnerable to external economic shocks. Additionally, the agricultural contribution to GDP has been declining, and the country faces challenges such as increasing business insolvencies and a precarious public budget situation. However, there are positive signs for the future, with GDP growth expected to pick up in 2025 and 2026, driven by a recovery in investments and private consumption.
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What You'll Learn
High inflation and declining real wages
Austria's GDP dropped by 1% in 2023, and a further decline of 0.6% is expected in 2024. This is due to a combination of factors, including high inflation, declining real wages, decreasing investment, lower exports, and weak private consumption.
Austria has experienced persistently high inflation, which has negatively impacted its competitiveness in both industry and tourism. While other eurozone countries have seen significant declines in headline inflation, Austria's downward trend has been sluggish. High inflation has caused the hotels, restaurants, recreation, and culture sectors to become significantly more expensive, potentially driving tourists to choose other destinations. Inflation in the services sector has been amplified by wage increases, particularly in the accommodation and food services sector, which saw a 28% rise in wages between the fourth quarter of 2019 and the first quarter of 2023, far exceeding the eurozone average of 16%.
The Austrian National Bank predicts that inflation will continue to affect the country's economy in 2024 and 2025. However, there are expectations for improvements in 2026, with a projected decrease in inflation to 1.7%. This expected decline in inflation should provide some relief to Austria's economy, helping to ease the burden of high prices on consumers and businesses.
To address the issue of high inflation, the Austrian government has implemented various measures, including the electricity price brake, which aims to mitigate the impact of high energy prices on households and businesses. Additionally, the government has introduced a climate bonus, a lump-sum compensation for the recently introduced CO2 emissions price, which contributes to the overall inflationary environment.
Despite the challenges posed by high inflation, Austria's economy is projected to recover, with nominal wages expected to increase by 7.5% in 2024 and 3.8% in 2025. This wage growth is driven by past inflation developments, and it is anticipated that real wages will rise over the forecast horizon. The government's expansionary fiscal stance is also expected to become broadly neutral over time, helping to stabilize the economic environment.
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Drop in exports to Germany
Austria's economy is closely integrated with other EU member countries, especially Germany, its largest export market and historically its main trading partner. Austria shipped US$213.9 billion worth of exported products around the globe in 2024, a 31.9% advance from $162.1 billion in 2020. However, compared to 2023, there was a drop of -1.1%.
In 2024, Germany accounted for 29.2% of Austria's exports, making it the largest export market for Austria. However, exports to Germany declined by 4.4% in volume. This decline is attributed to the "difficult market situation around the world", according to the country's industry association. Specifically, Austrian wine exports to Germany, which had grown by 62.7% or nearly €90m since their last decline in 2015, experienced their first downturn in eight years in 2024. The value of exports to Germany fell by 13.6% to €98.8m, and the export volume dropped by 4.4%.
Austria's economy is vulnerable to rapid changes in the German economy due to its historical dependence on Germany as its main trading partner. However, Austria's membership in the European Union has reduced this economic dependence by fostering closer ties with other EU economies. As a member of the European Union, Austria has gained access to the European Single Market, attracting foreign investors and increasing its international competitiveness.
Despite the recent decline in exports to Germany, Austria's overall exports have grown. In 2024, the total value of Austrian exports was $213.9 billion, up from $216.2 billion in 2023 and $162.1 billion in 2020. Pharmaceuticals, electrical machinery and equipment, and plastics were among the top export categories that experienced gains in value.
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Weak private consumption
Private consumption in Austria has been weak, with growth remaining close to zero in 2024 despite increasing real wages. This is a significant issue for the Austrian economy, as private consumption accounted for 52.9% of Nominal GDP in September 2023.
There are several factors contributing to the weak private consumption in Austria. Firstly, the country has faced an inflationary shock, with high nominal wage growth in 2024, which has likely impacted consumer confidence and spending. This is reflected in the consumer confidence index, which fell to -8 in March 2024. Additionally, there has been a tightening of the labour market, which may also be influencing consumption behaviour.
However, there are signs of improvement. Headline inflation decreased significantly from 7.7% in 2023 to 1.8% in September 2024, which should ease pressure on consumers. Nominal wages are expected to continue increasing in 2024 and 2025, which will further support purchasing power. The external sector is also expected to contribute positively to economic growth, with solid private consumption projected to support the recovery.
Overall, while weak private consumption has been a challenge for the Austrian economy, the outlook for 2025 and beyond is more positive. As inflation eases and real wages increase, consumer confidence and spending are expected to recover, driving economic growth.
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Poor business environment
Austria's business environment has been affected by a range of factors that have contributed to the drop in GDP. Firstly, the country's strong export dependence, particularly on Germany, which absorbs about 30% of its total exports, poses a vulnerability. A decline in exports to Germany, Austria's most vital trade partner, was observed in 2024, reflecting a longer-term trend. This over-reliance on a single market can make Austria's economy susceptible to downturns in its primary export destinations.
Secondly, the Austrian agricultural sector has been undergoing substantial reform under the EU's Common Agricultural Policy (CAP) since its accession to the EU in 1995. While Austrian farmers provide about 80% of domestic food requirements, the contribution of agriculture to GDP has declined since 1950 to less than 3%service sector generates the vast majority of Austria's GDP. However, within this sector, tourism is a critical component, accounting for around 10% of the country's GDP. While tourism is a significant source of revenue, it also makes the economy susceptible to fluctuations in the tourism industry, such as changes in travel trends, competition from other destinations, or external factors like economic downturns or pandemics that can impact travel behaviour.
Additionally, Austria's business environment has been impacted by the country's exposure to central, eastern, and south-eastern European (CESEE) countries through its banking sector. About half of the total profits of the Austrian banking system are generated in this region, and a quarter of its assets are located there. Any economic instability or financial crises in these regions can have a ripple effect on Austria's financial sector and, consequently, its overall business environment.
Lastly, the business environment in Austria has also been influenced by the country's regulatory landscape. While Austria scores well in regulatory quality, certain regulations, such as those related to commercial activities, can create complexities for businesses. For example, the requirement to register and pay a fee for commercial YouTube channels, restricted to Austrian or EU citizens only, may hinder the growth of online businesses and content creators.
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High unemployment and population growth
Since World War II, Austria has achieved sustained economic growth. However, there have been periods of decline, such as in 2023, when GDP dropped by 1%. This drop in GDP can be attributed to various factors, including declining investment, lower exports, and weak private consumption. While the causes of the decline are multifaceted, one critical aspect is the impact of high unemployment and population growth on the country's economic performance.
High unemployment can have a detrimental effect on a country's GDP, as evident in Okun's Law of Economics, which stipulates a positive relationship between employment and output. According to Okun's Law, a 1% increase in unemployment results in a more than proportionate decrease in a country's GDP, often doubling. This relationship is supported by empirical evidence, and while it may not hold true in all economic climates, it is particularly relevant during slowdowns. Therefore, addressing high unemployment is crucial for promoting economic growth and recovery.
Austria's unemployment rate is projected to increase from 5.1% in 2023 to 5.3% in 2024 and remain elevated through 2025. This rise in unemployment is expected to coincide with a decline in GDP, as predicted by Okun's Law. The increase in unemployment is partially mitigated by a large number of people reaching retirement age, reducing the size of the active workforce. Nevertheless, the prolonged recession in Austria is adversely affecting the labour market, hindering economic growth.
Population growth, on the other hand, can have both positive and negative effects on GDP. In Austria, the service sector generates the majority of the country's GDP, and a growing population can stimulate this sector, particularly in areas like tourism, which accounts for around 10% of Austria's GDP. A larger population can also contribute to the labour force, driving economic productivity. However, if the population growth rate exceeds the job creation rate, it can exacerbate unemployment, negatively impacting GDP as per Okun's Law. Therefore, it is essential to consider the interplay between population growth and employment in understanding their collective influence on GDP.
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Frequently asked questions
There are several factors that contributed to the drop in Austria's GDP. Firstly, the country experienced a decline in investment, lower exports, and weak private consumption, which held back economic activity. Secondly, Austria's strong export dependence on Germany and Eastern European economies made it vulnerable to economic downturns in those regions. Additionally, the country faced high inflationary pressures, dampened private consumption, and uncertainty in investments. The COVID-19 pandemic also impacted the country's economic prospects, with business insolvencies increasing significantly compared to pre-pandemic levels. Finally, the agricultural contribution to GDP has been in decline since 1950, and the service sector is now the most important for the country's GDP.
The decline in private consumption and investment was caused by a combination of factors, including financial tightening, weak global demand, and high inflation. High energy prices following the war in Ukraine also played a role, as they impacted household spending and business operations.
The prolonged recession in Austria has moderately impacted the labour market. While unemployment has increased, the number of job vacancies remains high. The increase in the unemployment rate is mitigated by large cohorts reaching retirement age.
Austria's GDP is expected to grow by 1% in 2025 and 1.4% in 2026 as the negative growth factors fade. Private consumption is projected to recover as inflation decreases and consumer confidence improves. Investments are also forecast to increase, driven by exports to Austria's main trading partners and the recovery of its main trading partners' economies.
