Last update (15/05/2023)
A marked slowdown in growth in 2023
In 2022, Austria’s economy experienced a strong expansion that was particularly pronounced in the first half of the year and mainly driven by the lifting of remaining pandemic-related restrictions, as well as by the recovery of the tourism sector. Overall, real GDP increased by 5.0%, which is the highest rate since Austria joined the EU in 1995. Following a stagnation in the final quarter of 2022, GDP is expected to have dropped by -0.3% in the first quarter of 2023, due to a strong reduction in goods exports. Furthermore, the combination of high energy prices and comparatively low wage growth is set to negatively affect growth dynamics in the first half of 2023. Accelerating real wage growth, partly due to government measures to mitigate the impact of high energy prices, is expected to lead to a rebound in private consumption. Consequently, real GDP is forecast to increase by 0.2% in the third quarter of 2023 and 0.3% in the fourth quarter. Given the economy’s subdued performance in the first half of the year, overall growth is projected to amount to 0.4% in 2023.
The high retail energy prices are expected to gradually subside over the forecast horizon and economic activity is set to pick up slightly in 2024, with real GDP growth forecast at 1.6%. This dynamic is projected to be underpinned by stronger private consumption growth supported by wage growth, which is expected to overcompensate HICP inflation growth. Additionally, an increase in exports is projected.
Energy prices and wage developments drive inflation
In 2022, rising energy prices and, to some extent, increases in corporate profits, were the main drivers pushing HICP inflation up to 8.6%. Retail energy prices are expected to remain high over the first two quarters of 2023, but the gradual pass-through of lower wholesale energy prices to consumers is expected to lead to a decline in inflation as from 2023-Q3. Lower energy inflation and decelerating corporate profits due to high unit labour costs are set to lower headline inflation in the second half of 2023. However, significant wage increases are projected to lead to substantial increases in the price of services. The HICP inflation rate is forecast to reach 7.1% in 2023, before gradually decreasing further to 3.8% in 2024. Core inflation is projected to stay high over the forecast horizon due to strong wage growth developments.
The labour market weathered the crisis well
The labour market performed well in 2022, with employment increasing by 2.6% and the unemployment rate falling to 4.8%. Despite economic headwinds and persistent labour shortages, the labour market is expected to remain resilient. Employment is set to slightly increase further over the forecast horizon, mostly thanks to increased participation of women and older workers in the labour market. The increase in labour supply is projected to outpace employment growth, causing the unemployment rate to increase slightly to 4.9% in 2023 and to 5.0% in 2024. Nominal wages are expected to increase by 8.3% in 2023 and 6.6% in 2024. Therefore, real wages should grow again in 2023 and 2024.
Deficit and debt remain on a downward path
In 2022, the general government deficit amounted to 3.2% of GDP and the debt ratio to 78.4%. Over the forecast horizon, public finances are expected to improve, largely reflecting the phasing out of COVID-19-related support measures, as well as of some of the measures implemented to mitigate the economic and social impact of high energy prices. At the same time, new large-scale energy-related measures, such as an electricity cost brake and energy cost subsidies for companies, are set to limit the narrowing of the deficit. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 1.8% of GDP in 2023, compared with 1.5% in 2022. The Commission currently assumes the net cost of energy support measures at 0.1% of GDP in 2024. Deficit developments in 2023 are also affected by the phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 1.0% of GDP in 2022.
Overall, the general government deficit is forecast to improve to 2.4% of GDP in 2023 and to 1.3% in 2024. On the expenditure side, much of the budget improvements will rely on the phase-out of new support measures in 2023 and 2024. However, the abolition of the tax bracket creep, increasing interest rates, ageing-related costs, and the indexation of some social benefits are expected to weigh on budget developments also beyond the forecast horizon. On the revenue side, important tax sources, that is VAT, personal income taxes, and corporate profit taxes, as well as social contributions, are set to grow dynamically in 2023 due to a robust labour market and still high inflation. In 2024, revenues are overall projected to grow more moderately, despite a pick-up in consumption and a robust labour market.
Austria’s nominal GDP growth contributes to a continuous downward path of the public debt-to-GDP ratio, which amounted to 78.4% at the end of 2022 and is expected to further decrease to 75.4% in 2023 and 72.7% in 2024, in line with a declining headline deficit.
