Austria Overcomes Recession, But Inflation Remains High

The economic researchers from Wifo and IHS are raising their economic forecast for the current year. In June, Austria's economy was expected to have zero growth (Wifo) or a "mini" plus (IHS) of 0.1 percent, but now a plus of 0.3 or 0.4 percent is expected. The longest economic downturn of the Second Republic would thus be history. However, the economists are significantly raising the inflation forecast for this year.

Consumption as a Driver

The economic recovery will be supported by private consumption, but foreign trade in goods is still declining this year, explained Wifo. The economic dynamics are expected to "significantly lag behind previous recovery phases" in 2025/2026, according to IHS, citing "the subdued international economy and domestic structural problems." For 2026, the economists lowered their economic growth forecast from June by 0.1 percentage points to 1.1 or 0.9 percent. In 2023, the real gross domestic product (GDP) in Austria shrank by 0.8 percent and in 2024 by 0.7 percent.

Inflation of 3.5 Percent Expected This Year

After the record inflation years of 2022 and 2023 with 8.6 percent and 7.8 percent, inflation fell to 2.9 percent in 2024. However, the sideways movement in inflation expected by Wifo and IHS has not occurred this year, with both institutes now expecting 3.5 percent for the current year. In recent months, food prices have "increased significantly" and contrary to expectations, the price pressure on labor-intensive services has not eased, according to IHS. Next year, Wifo and IHS forecast a decline in inflation to 2.4 percent.

The economic recovery is reaching the labor market with a delay: For this year, economists expected an increase in the unemployment rate by national calculation by 0.5 or 0.4 percentage points to 7.5 (Wifo) or 7.4 percent (IHS). Next year, the unemployment rate is expected to fall to 7.3 percent.

Growth Below Eurozone Level

The Wifo published the short-term economic forecast for the first time simultaneously with the medium-term forecast. The real GDP growth from 2026 to 2030 is expected to average 1.1 percent per year. According to Wifo, the Austrian economy is likely to grow 0.2 percentage points weaker in the medium term than the average of the Eurozone.

Wifo/IHS Slightly More Optimistic Than Marterbauer on Budget Deficit 2025

Wifo and IHS also forecast a general government deficit of 4.2 and 4.3 percent of economic output for this year and 3.9 and 4.1 percent for the coming year. Finance Minister Markus Marterbauer (SPÖ) is somewhat more pessimistic and reported an expected budget deficit of 4.54 percent for 2025 to the EU last week.

The general government deficit in Austria was significantly above the Maastricht threshold of 3 percent in 2024, at 4.7 percent of gross domestic product (GDP). In July, the opening of an EU deficit procedure against Austria was officially decided for this reason.

"Considerable Uncertainties" in Budget of States and Municipalities

The forecast of budget development at the level of states and municipalities is "associated with considerable uncertainties," warned the IHS in its economic report. Decided austerity measures would relieve the budgets from the second half of 2025. Wifo expects public sector spending cuts of nearly 3.5 billion euros in 2025, including the elimination of the climate bonus and the suspension of educational leave.

In Wifo's long-term forecast, the combined deficit of the federal, state, municipal, and social security institutions will only slowly decrease to 3.7 percent by 2030. The state's budget deficit is expected to average 3.8 percent of nominal GDP from 2026 to 2030, and the national debt is expected to rise to 88.3 percent of nominal economic output by 2030. Austria would thus violate the EU's Maastricht debt rules by the end of the decade.

(APA/Red)

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