After a strong first half of 2022, the economy is expected to slow down strongly on the back of high energy prices and a drop in business and consumer sentiment. HICP inflation is forecast to rise substantially in 2022 and to stay high in 2023. The headline deficit as well as the public debt ratio are projected to decrease throughout the forecast horizon, supported by strong nominal growth and dynamic tax revenues.
Last update (forecast)
|GDP growth (%, yoy)||4,6||4,6||0,3||1,1|
|Inflation (%, yoy)||2,8||8,7||6,7||3,3|
|General government balance (% of GDP)||-5,9||-3,4||-2,8||-1,9|
|Gross public debt (% of GDP)||82,3||78,5||76,6||74,9|
|Current account balance (% of GDP)||0,4||0,2||-0,0||-0,1|
A strong rebound in 2022
In the first half of the year, Austria’s economy experienced a strong expansion. Following a 1.3% q-o-q increase in the first quarter of this year, GDP increased by 1.9% in the second quarter, driven by strong private consumption. However, the energy price shock is set to negatively affect growth dynamics. As a result, real GDP in the second half of 2022 is expected to decrease, by 0.1% in the third quarter and by 0.4% in the fourth quarter. Still, given the strong economic development in the first half of 2022, overall growth is projected to reach 4.6% in 2022.
Subdued growth in 2023 and 2024
The headwinds are expected to only gradually fade over the forecast horizon and economic activity is set to slow down substantially in 2023. The growth rate for 2023 is forecast to stand at 0.3%. With gas and electricity prices assumed to stay high over the first half of 2023, business investment growth is projected to be low in 2023, while consumption is expected to decrease slightly, due to lower real wages and high uncertainty. Several government measures to mitigate the impact of high energy prices are set to almost stabilise household income, avoiding a further substantial decrease. In 2024, wages are expected to slightly overcompensate the HICP in the light of a tight labour market, supporting private consumption in 2024. Overall, real GDP is expected to grow by 1.1% in 2024.
Energy prices drive inflation
In 2022, rising energy prices, especially the increase in electricity and gas prices, drive the noticeable increase of the HICP over the course of the year. Energy prices are expected to remain high over the coming quarters, but to slowly decline as from the end of 2023. As energy prices are typically only gradually passed on to consumers, inflation is forecast to peak in the fourth quarter of 2022, leading to a yearly HICP inflation rate of 8.7% in 2022, before gradually decreasing to 6.7% in 2023 and 3.3% in 2024. Core inflation is projected to reach 5.4% in 2022, staying on a similar level in 2023 before decreasing to 4.1% in 2024.
The labour market weathers the crisis well
The Austrian labour market has performed well in the first half of 2022, with employment climbing up by 2.5% and the unemployment rate declining by 1.2 pps. to 4.8% despite the expected downturn in the second half of the year. The labour market is expected to stay strong also during 2023 and 2024. Employment is set to slightly increase further over the forecast horizon mainly because of increased participation of women and older workers in the labour market. The increase in labour supply is projected to outpace employment growth, causing unemployment to increase slightly. The unemployment rate is forecast to increase from 4.8% to 5.0% in 2023 and to 5.1% in 2024.
Nominal wages are expected to increase by 4.3% in 2022, followed by an increase of 6.6% in 2023 and 4.9% in 2024. Thus, there will be real wage growth only in 2024. Measures reducing the tax burden of households (the eco-social tax reform of 2021, as well as the abolition of the tax bracket creep) in combination with specific measures to mitigate the economic and social impact of high energy prices are expected to help avoid a severe drop of disposable income, especially in 2023 and 2024.
Deficit and debt on a downward path
Austria’s public finances are projected to improve over the forecast horizon, despite sluggish growth in 2023 and 2024. The government headline deficit is expected to decrease to 3.4% of GDP in 2022. On the expenditure side, this largely reflects the phasing out of support measures in the context of the COVID-19 crisis (e.g., short-time work, fixed cost subsidies, as well as other transfers), which outweigh the budgetary impact of new measures to mitigate the economic and social impact of high energy prices, which are projected to account for 1.6% of GDP in 2022 and 1.1% in 2023.
These measures include lump-sum payments to all households (0.8% of GDP), support for energy-intensive companies (0.3% of GDP), and some targeted lump-sum payments for specific household groups. Additionally, the purchase of a strategic gas reserve (0.8% of GDP) significantly contributes to the headline deficit in 2022.
On balance, the headline deficit is forecast to fall to 2.8% of GDP in 2023 and to 1.9% in 2024. These improvements are based on strong tax revenue due to stable consumption growth and inflation developments, which increase the tax base, as well as on the continued phasing out of COVID-19 and energy-related measures. However, policy measures taking effect in 2023, such as some energy-related measures, the abolition of the tax bracket creep and the indexation of some social benefits will weigh on budget developments also beyond the forecast horizon.
Public debt is expected to decrease to 78.5% of GDP in 2022 on the back of strong nominal GDP growth. It is set to continue to decrease over the forecast horizon, even though at a slower pace due to less dynamic growth. The public debt to GDP ratio is projected to decline to 76.6% in 2023 and to 74.9% in 2024.