Austrian economy leaves recession

In 2025, Austria will experience its first year of growth after two consecutive years of recession. Private and public consumption in particular are supporting economic development. Investments are also contributing positively to growth. Exports continue to be heavily burdened by high energy and unit labour costs as well as US tariffs. We expect positive, moderate GDP growth in 2026. A key factor for the increase in growth is Germany's multi-billion-euro fiscal packages in the military and infrastructure sectors. In our opinion, these should have a noticeable effect on Austrian exports and, subsequently, on investment in Austria. Inflation rose again in Austria in 2025. The reasons for this were, on the one hand, price pressure from the energy sector and, on the other hand, persistently high core inflation, which was mainly due to high service prices. Lower wage agreements for 2026 and the expiry of base effects in energy prices should lead to a decline in inflation in the coming year. Following an increase in the unemployment rate in 2025, we expect it to stabilise in the coming year as part of the economic recovery.

The European Central Bank (ECB) began lowering its key interest rates at the beginning of June 2024. Since the last interest rate cut in June 2025, the key interest rate has remained unchanged at 2.0%. In our view, the ECB should have reached the end of the current cycle of interest rate cuts for the time being, and we expect key interest rates to remain unchanged. The noticeable increase in defence spending at European level and the German economic stimulus package have caused German yields to rise. We believe that German yields will consolidate close to current levels before resuming their upward trend later in the coming year. The risk premium on 10-year Austrian government bonds compared with 10-year German government bonds has narrowed slightly since the beginning of the year and was recently just under 30 basis points. We expect the risk premiums on 10-year Austrian government bonds to remain stable in the coming quarters.

Following several reports in early and mid-November that it was likely that the assumed budget path could not be maintained due to the financial difficulties of local and regional authorities, Austria's budget deficit is once again the focus of attention. Based on the latest figures, we expect the budget deficit this year and next to be even higher than in 2024. As this expected and also demanded consolidation by the rating agencies appears unlikely according to current forecasts, changes in the outlook or even in the rating cannot be ruled out in the coming quarters.

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