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Saturday, April 13, 2024

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Austria

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GDP: USD471.4bn (World ranking 33)
Population: 9.0mn (World ranking 98)
Form of state: Parliamentary republic
Head of government: Karl Nehammer (Chancellor)
Next elections: 2024, Legislative

Strengths

  • The Austrian government showed a swift and substantial policy response to the pandemic and energy crisis, effectively stabilizing the economy and mitigating second-round effects such as unemployment and insolvencies
  • Austria maintains a strong business environment, excelling in regulatory quality and rule of law
  • The country benefits from a steadily growing current account surplus, supported by the relative competitiveness and diversification of its export product palette

Weaknesses

  • The Austrian economy faced volatility in recent years, experiencing a recession in 2023 due to factors such as financial tightening, weak global demand and high inflationary pressures
  • Despite initial stabilization efforts, the current financial tightening is negatively impacting economic prospects, leading to rising unemployment
  • The exposure of Austria’s banking sector to CESEE countries poses a medium-term financial risk. Additionally, the country’s strong export dependence, especially on Germany and Eastern European economies, contributes to vulnerability, indicating a need for diversification

Economic overview

Weak growth ahead

Austria boasted a solid growth track record in the decade leading up to the Covid-19 shock, recording average annual GDP growth of +1.5%, slightly above the +1.4% for the Eurozone as a whole. In 2020, Austrian GDP contracted by -6.5% despite the initial resilience of its industrial sector, as services, notably the important tourism sector, were hit hard by Covid-19 related business closures and international travel restrictions. While the recovery in 2021 proved relatively swift, benefiting from the revival in global trade, this was interrupted by the Omicron wave, with Austria being one of the first Eurozone countries to tighten containment measures and raise the issue of compulsory vaccination to get a grip on the pandemic. In 2022, Austria saw an upswing in annual GDP growth of nearly +5% due to easing supply chain pressures and strong underpinnings of private consumption, including a solid labor market and elevated household savings, despite the elevated energy prices following the war in Ukraine. Financial tightening, weak global demand and high inflationary pressures dampened private consumption and uncertainty weighed on investments. This led the Austrian economy into recession in 2023 with a decrease of -0.2% in GDP. Austria experienced a dichotomy in its business cycle in 2023; manufacturing and closely related sectors fell into recession while market-related services were expanding overall. Looking ahead, we expect the Austrian economy to stagnate in 2024 at +0.6% and to pick up by +1.5% in 2025. Business insolvencies increased slightly compared to 2022 but still remained around pre-pandemic levels.

The Austrian government’s swift and sizeable policy response to the pandemic shock and the energy crisis has helped stabilize the economy while keeping a lid on second-round effects including unemployment and insolvencies. But current financial tightening is weighing on economic prospects, which leads to an unfavorable development in the labor market. In 2023, unemployment increased as weak economic activity coincides with an expansion in the labor force, which will ease again in 2024. Government debt peaked at a relatively moderate 83% of GDP in 2020 – when compared to a Eurozone average of around 100% – up from 70% in 2019 and stood at 78% in 2022. With the tax reform of 2022-24, which also includes a tax reduction on corporate income as well as households’ disposable income, the government aims to reduce the public debt burden by fostering higher economic growth rather than relying on increased revenues, with a projected debt level of around 75% in both 2024 and 2025. The current account surplus has steadily grown throughout 2023, underpinned by the relative competitiveness and diversification of its export product palette, with expectations of further recovery in the last quarter of the year.

Fiscal consolidation ahead

Overall, indicators show that the short-term financing risk is low. The indicators that need monitoring in the short to medium run are: the fiscal deficit has moderated in 2023 from 3.2% in 2022 and further improvements are projected for 2024 and 2025, reaching 2.4% and 2.2% of GDP, respectively; the evolution of inflation was still high in 2023 but will expectedly drop to 3.2% in 2024.

In the medium run, the exposure of Austria’s banking sector to Central, Eastern and South-Eastern European (CESEE) countries remains a concern. About half of total profits were generated in the region, while about a quarter of Austrian banking system assets are located there. In addition, Austria’s strong export dependence, with a high concentration on Germany (which absorbs about 30% of total exports) as well as Eastern European economies, poses a vulnerability.

Mind the growing social discontent and a possible political shift to the right

The Austrian business environment proves very strong: the country scores very well in regulatory quality, rule of law and control of corruption. In particular, trading across borders, enforcing contracts, resolving insolvencies, getting electricity and registering property are ranked at the top among other OECD high-income countries.

The 2019 snap election resulted in a coalition between the Austrian People’s Party (ÖVP) and the Greens. However, the government was shaken by chancellor Sebastian Kurz’s resignation after pressure triggered by a corruption scandal. In early December 2021, former ÖVP interior minister Karl Nehammer became the new chancellor of Austria, facing heightened social discontent following the implementation of renewed lockdown measures – at times focused solely on the unvaccinated – as well as the announcement that a vaccine mandate will apply from mid-March 2022 onwards. Austria will face general elections in 2024, which will also determine the chancellor. We expect the political discourse in Austria to increasingly shift to the right, with a focus on migration topics. While the government has become more assertive on the migration front, we believe it will be hard for the governing ÖVP to regain votes lost to the right-wing populist Freedom Party.

CEOWORLD magazine - Insights - Austria