Recession Over: Economic Upswing for Austria Expected in 2026

Rising investments and higher government consumption have supported Austria's economy this year. Wifo and IHS slightly increased their economic forecast for the current year and 2026 on Thursday. The gross domestic product (GDP) is expected to grow by 0.5 percent this year and by 1.2 and 1.0 percent in the coming year. In October, economists expected economic growth of 0.3 (Wifo) and 0.4 percent (IHS) for 2025 and 1.1 and 0.9 percent for 2026.

Austria's Economy Grows by 0.5 Percent This Year

For Austria's economy, there is "a light at the end of the tunnel," said Wifo Director Gabriel Felbermayr at the presentation of the economic report in Vienna. The recession of 2023 and 2024 was the longest economic downturn of the Second Republic. For 2026 and 2027, Felbermayr expects "no stormy upswing," but growth slightly above the average of the Eurozone.

The director of the Institute for Advanced Studies (IHS), Holger Bonin, warned against too much optimism at the press conference. "The current economic recovery is on shaky ground." Bonin pointed to the still challenging situation for the Austrian export industry and the strained public finances. The changes in US security policy will also cost Europe "considerable resources." Austria must also prepare for higher security expenditures.

Weak Recovery Phase 2026/27

For 2027, Wifo and IHS forecast economic growth in Austria of 1.4 and 1.1 percent, respectively. "Due to a loss of international competitiveness and protectionist tendencies in global trade, the pace of economic recovery is likely to lag behind previous recovery phases," write the IHS economists in their economic forecast.

According to the Wifo forecast, the Austrian industry is expected to have "passed the low point at the end of 2025." Domestic exports and industrial gross value added are expected to rise again "in the wake of the global economy" in the coming year. From 2023 to 2025, exports were declining. US import tariffs, trade policy uncertainty, and the weakness of the German industry are burdening Austria's export economy. However, the average US tariffs are lower than expected, explained the Wifo chief. US President Donald Trump has so far erected "a patchy tariff wall."

Disposable Household Incomes Decrease by 0.9 Percent in Real Terms in 2025

Both institutes do not expect private household consumption to be a turbo for Austria's economy. The still high inflation and low wage settlements dampen the income development of private households. According to Wifo, the disposable incomes of private households are expected to decrease by 0.9 percent in real terms this year and to rise minimally by 0.1 percent in 2026. In 2024, the income increase was still 4.4 percent. Consumers are now increasingly relying on their savings again. IHS expects the savings rate to drop from 11.7 percent in 2024 to 9.2 percent by 2027. Even if the savings rate becomes single-digit again in 2026, it is still "high" by international standards, according to the IHS director.

Inflation Will Noticeably Decrease in 2026

There is good news regarding inflation: It is expected to decrease from 3.5 percent (Wifo) and 3.6 percent (IHS) this year to 2.6 and 2.5 percent next year. At the beginning of 2026, the base effect of the energy price increase from January 2025 will disappear, causing the inflation rate to drop by up to 1 percentage point according to Wifo and IHS. However, Austria's inflation rate will remain significantly above the Eurozone average in 2026 and 2027. The domestic government must "continue to prioritize curbing inflation," emphasized the Wifo director. To combat inflation, more competition and a focus on supply-side policies, as well as restraint from the public sector in fee increases, are needed.

The weak economic development in recent years has noticeably impacted the labor market. The national unemployment rate rose from 6.3 percent in 2022 to 7.4 percent in 2025. Next year, Wifo and IHS expect a slight decrease in the unemployment rate to 7.3 percent. In 2027, the unemployment rate is expected to further decrease to 7.0 and 7.1 percent.

Budget Deficit Estimated at 4.6 and 4.4 Percent in 2025

Wifo and IHS advocate for stronger budget consolidation starting in 2027. The two research institutes forecast a general government budget deficit in Austria of 4.6 and 4.4 percent of the gross domestic product (GDP) for this year. As a result of budget consolidation, both institutes expect a deficit of 4.2 percent next year and 4.0 percent in 2027.

The combined budget deficit of the federal, state, municipal, and social security institutions will remain significantly above the Maastricht threshold of 3 percent in the coming years. For comparison: In 2024, the domestic deficit was 4.7 percent. In July, the initiation of an EU deficit procedure against Austria was officially decided.

IHS Chief: "Strongly Apply Fiscal Brakes" from 2027

For IHS Chief Holger Bonin and Wifo Director Gabriel Felbermayr, the deficit, even if it decreases to four percent by 2027, is "far too high." The public sector must "strongly apply the fiscal brakes," said Bonin during the presentation of the economic forecast on Thursday. In 2026, the government must make "decisive decisions." Bonin sees potential savings in the education and health systems, pensions, and the "subsidy jungle."

Wifo Director Felbermayr pointed to the sharply increased government spending. Public consumption has increased by 16 percent in real terms since 2019, while the gross domestic product (GDP) has only grown by 3.5 percent. If the economy now performs better, the focus of savings must be on the revenue side. On the revenue side, the public sector is "strongly at the limit." Felbermayr supports a property tax increase but only if it does not hinder financial reform efforts in other areas.

Finance Minister Markus Marterbauer (SPÖ) expressed satisfaction with the upwardly revised economic forecast. "The improved economic situation supports the federal government's economic policy and budget consolidation," said Marterbauer in a statement. He is "only satisfied when the budget deficit, unemployment, inflation, and greenhouse gas emissions noticeably decrease." For Finance State Secretary Barbara Eibinger-Miedl (ÖVP), the federal government has "already set important courses to achieve a sustainably effective upswing in Austria."

Higher Budget Deficit for States and Municipalities

The currently available data suggests that the budget development at the federal level is "slightly better than planned," while the deficits at the state and municipal levels "are likely to be higher," writes the Institute for Advanced Studies (IHS) in its economic forecast.

The Wifo also pointed to "the continued strong growth in expenditures" of the federal states and municipalities. In addition to the obligations under the Future Fund, demographic challenges in the areas of health, care, and elementary education are driving the expenditure dynamics. In terms of public revenues, "the subdued development of private consumption" dampens the value-added tax revenue, according to the Wifo economists. However, the suspension of the compensation for the last third of the cold progression and the strong increase in the maximum assessment base ensures "robust growth" of wage-related levies.

National Debt Rises to Nearly 80 Percent

According to the Wifo forecast, Austrian national debt is expected to rise from nearly 80 percent of economic output in 2024 to nearly 85 percent in 2027.

Many Reactions to Wifo/IHS Forecast

The Vice President of the Austrian Federal Economic Chamber (WKÖ), Martha Schultz, urgently called for "further relief" for companies in light of the economic forecast. The Federal Managing Director of the ÖGB, Helene Schuberth, is pushing for more funds for active labor market policy and qualification, as well as investments in public services, care, and the "transformation of our economy." IV Secretary General Christoph Neumayer advocates for "profound structural reforms" to stimulate the economy.

FPÖ budget spokesman Arnold Schiefer feels confirmed by the Wifo/IHS data that the government's double budget and budget consolidation have failed. The Green Party's economic spokeswoman, Elisabeth Götze, calls for more measures to combat inflation and more investments in renewable energies. SPÖ finance spokesman Jan Krainer and ÖVP economic spokesman Kurt Egger see the current economic forecast as a positive confirmation of government policy. NEOS Secretary General Douglas Hoyos sees a "clear mandate for the government to deepen the reform course."

(APA/Red)

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