Austria’s economy is growing – But momentum remains subdued

Growth, yes – Momentum, no

In early September, Statistics Austria published a preliminary estimate of economic performance for the second quarter of 2026. According to the data, the Austrian economy contracted by -0.1% compared to the previous quarter. On a year-over-year basis, economic activity increased by +0.4%, following 0.8% growth in the first quarter. We expect the Austrian economy to grow moderately this year, despite the conflict with Iran. We expect GDP growth of +0.7% for the current year. For 2027, we forecast above-potential growth of +1.1%, followed by 1% growth in 2028. Against the backdrop of the resurgence of the conflict between Iran, Israel, and the U.S., energy prices have risen significantly from their interim lows at the end of June. We therefore expect a HICP inflation rate of 3.1% for 2026 as a whole. Starting in 2027, a steady decline should set in, bringing the inflation rate down to 2.2% in 2028.

At its most recent meeting, the ECB Governing Council decided to raise key interest rates by 25 basis points. The deposit rate—the key monetary policy rate—thus rises to 2.5%. The war in the Middle East is leading to a noticeable rise in inflation, which is why inflation is likely to remain well above the target for an extended period. According to the ECB’s new forecasts, the risks of inflationary pressures broadening are increasing. For now, we do not expect any further interest rate hikes by the ECB this year. However, should signs of broadening inflationary pressures intensify, another rate hike would become likely. We expect the risk premiums on 10-year Austrian government bonds to remain around 25 basis points in the coming quarters.

In recent months, especially since mid-August, yields in the bond markets have gained noticeable momentum. This is due to rising inflation expectations resulting from the resurgent conflict with Iran. A noticeable increase in investment activity from both the private and public sectors is also likely to contribute to this trend. While growth in the U.S. is driven primarily by artificial intelligence, Europe is seeing a mobilization of public funds in the areas of infrastructure and defense—as exemplified by Germany’s special funds. In this Macro Outlook, we therefore aim to examine investment plans in Austria and assess their impact on GDP growth.

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