Austria: Modest growth after two years of recession

The downward trend in economic output remained broad-based in 2024. Investments and exports fell sharply over the course of the year. Imports also fell sharply. While private consumption virtually stagnated, public consumption grew significantly. In view of the subdued sentiment indicators in the industrial and construction sectors, which are important for Austria, and the fact that consumer confidence remains in strongly negative territory, we expect economic development to remain weak in 2025. In 2026, we anticipate a noticeable increase in economic activity as a result of Germany’s multi-billion euro fiscal packages, which we believe will stimulate exports and subsequently investments in Austria. As average annual inflation traditionally serves as the basis for various collective labor agreement negotiations, we expect low wage growth in 2025. Accordingly, we expect a gradual slowdown in inflation in the services sector this year. Due to the expiring electricity price brakes and rising grid fees, an increase in electricity prices will be observed in 1H25. Overall, we expect the inflation rate to fall in 2025. The current weak economic development will continue to weigh on the labor market in the coming quarters. However, we expect a stable unemployment rate in 2025.

The European Central Bank (ECB) began cutting its key interest rates from the beginning of June 2024. After six rate cuts, we expect a pause in interest rate cuts at the April meeting. 10-year German Bund yields rose by almost 40bp following the announcement of far-reaching fiscal measures. This announcement led to a short-term widening of premiums on Austrian government bonds. We expect risk premiums to continue to fall slightly in the coming quarters, partly due to necessary budget consolidation measures.

After a record 155 days, the Stocker government was sworn in by Federal President Alexander van der Bellen on March 3, 2025. The new government has already adopted measures for budget consolidation. Together with other planned measures, we expect the budget deficit to be below the important 3% mark in 2025. This would avert a possible excessive deficit procedure by the European Commission. The US administration under President Trump is still considering extensive tariffs. While tariffs on steel and aluminum are already in force, it remains to be seen whether US President Trump will follow through with his tariff threats to introduce reciprocal tariffs on almost all product groups. Calculations show that Austria would be hit harder by such tariffs than the Eurozone and growth would be significantly dampened.

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