Austrian economy has bottomed out

The data on economic performance in 1Q25 paints a mixed picture. On one hand, gross domestic product (GDP) declined for the eighth consecutive quarter on an annual basis. On the other hand, GDP grew slightly compared with the previous quarter. Investments, exports and imports declined on an annual basis, while private and public consumption grew. Given the subdued sentiment indicators in the industrial and construction sectors and the continuing strong negative consumer confidence, we expect economic development to remain weak in 2025. In 2026, we expect a noticeable increase in economic activity as a result of Germany's multi-billion-euro fiscal packages, which should stimulate exports and, subsequently, investment in Austria. Due to the expiry of electricity price brakes and rising grid fees, electricity prices rose in 1H25. Due to low wage growth in 2025, we expect inflation in the service sector to gradually ease over the course of the year. Overall, we anticipate a stable inflation rate in 2025. The current weak economic development will continue to weigh on the labor market in the coming quarters. We expect the unemployment rate to rise slightly in 2025.

The European Central Bank (ECB) began lowering its key interest rates at the beginning of June 2024. After six further interest rate cuts, another 25bp were cut at the June meeting. This should mark the end of the current cycle of interest rate cuts for the time being. The yield on 10-year German government bonds is now at 2.5%, in the middle of this year's yield range. The risk premium on 10-year Austrian government bonds compared with 10-year German government bonds has remained unchanged since the beginning of the year. We expect risk premiums to decline slightly in the coming quarters, partly due to the Austrian federal government's budget consolidation measures.

In 2023 and 2024, Austrian industry experienced one of the sharpest declines in production in recent history. Labor shortages, bureaucratic red tape, energy price inflation and competitiveness are buzzwords that have been frequently used in connection with Austrian industry in recent times. Even the word ‘deindustrialization’ is now being used by some industry observers. A look at the data shows that labor shortages are not a relevant factor in the weakness of industry. High energy prices and high unit labor costs compared to European competitors weighed on Austrian industry in previous years amid a global slowdown in manufacturing.

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