Only a tiny recovery expected in 2024
In 2024, growth in the Austrian economy is likely to resume after a contraction of 0.8% in 2023. However, it is likely to be very small and mainly occur in the second half of the year. Services are expected to expand further, but at a slower pace than in 2023. Barring tourism, sentiment for this sector is not high. This is partly owing to weak development in manufacturing which has begun to negatively influence some services like transport and trade. Tourism demand will remain high, even though prices in the hospitality industry are rising fast and are causing tourists to substitute lower quality offers for expensive packages, which is weighing on growth. The manufacturing sector, which has been in recession since mid-2022, is unlikely to recover before mid-2024. Manufacturing sentiment is at its lowest point since the start of the pandemic in 2020. Manufacturer surveys show that the most important obstacle to production is the lack of demand. The rebound in eurozone manufacturing is taking its time, especially in Germany – Austria´s main trading partner – where it is on hold. Nevertheless, with the resumption of purchasing power and reduced financing costs in the eurozone, the demand for investment goods from Austria is expected to increase from mid-2024. Combined with growth in services, albeit at a slower pace, this should lead to slightly positive GDP growth in 2024.
Private consumption, thanks to the easing of inflation and recent collective wage agreements, will be the main driver of recovery in 2024. In most sectors, collective agreements have been automatically indexed based on the 2023 inflation rate. Given the expected average nominal wage increase of 6.6% and the inflation rate of 3.7% for 2024, real wages should increase by 2.9%, one of their highest growth rates in the last two decades. The outlook on investment is not as positive but there is light at the end of the tunnel. Interest rate hikes tend to pass through the Austrian economy more strongly due to the prevalence of variable-interest loans to both households and firms The ECB should cautiously lower interest rates from June 2024. A total of up to three rate cuts could be in the pipeline for the year 2024. However, the number and scope of the cuts will clearly depend on the development of (core) inflation and nominal wages. At the same time, while the ECB will fully reinvest the principal payments from maturing securities purchased under the Pandemic Emergency Purchasing Programme (PEPP) during the first half of 2024, it intends to reduce reinvestments by €7.5 billion per month in the second half and cease completely thereafter. European monetary policy will therefore remain restrictive even with a few interest rate cuts. While investment into equipment is expected to recover slowly, as firms gain confidence in the recovery of Austria´s main trading partners and benefit from reduced financing costs, investment in construction will reach a trough at some point in 2024. The construction sector is suffering from costlier building materials and financing. While the latter are expected to ease in 2024, sentiment and expectations in the sector are at their lowest levels since the beginning of the pandemic in 2020. In 2023, construction firms cut jobs, a sign that it will most likely take some time yet for recovery to set in.
Unchanged budget deficit and rising current account surplus
Austria´s budget deficit as a share of GDP is expected to remain unchanged in 2024. There will be a reduction in spending regarding inflation relief measures. The energy cost subsidy for firms ran out at the end of 2023. Conversely, the brake on electricity prices for households was extended until the end of 2024, even though the magnitude of the subsidy was reduced. Other expenses such as interest payments and social benefits will increase, with the latter experiencing growth due to increased consumer prices. Revenues were at a record high in 2023, caused by higher prices in combination with a constant VAT rate, a development that is expected to continue in 2024 with the recovery in private consumption. By contrast, a reduction in the corporate income tax rate and the indexation of income tax brackets to inflation will weigh on revenue growth. Public debt as a share of GDP is expected to increase slightly in 2024.
Austria´s current account stood at its usual surplus in 2023 and is likely to expand further in 2024. The services trade balance will increase, carried by high inbound tourism receipts, and will be the main driver of the current account surplus. Terms-of-trade improvements should also further enhance the goods trade balance in 2024. In general, both services and goods trade will benefit from Austria´s main trading partners’ slow recovery. Both the balance of primary and secondary income should remain negative in 2024.
Round robin in the polls before the general election in the fall of 2024
Karl Nehammer from the centre-right Austrian People's Party (ÖVP) has been the Chancellor of the Alpine Republic and leading a coalition out of ÖVP (holding 71 out of 183 seats in Parliament) and the Greens (26 seats) since December 2021. Nehammer is the successor to Alexander Schallenberg, who acted as interim chancellor for a few months after Sebastian Kurz (both of the ÖVP) resigned. Kurz stepped down and opted out of political life after a corruption scandal in October 2021. In addition, in February 2024, Kurz was convicted of perjury before a Parliamentary investigation committee. The ÖVP has consequently lost a great deal of support from public opinion, right when the next general election in the autumn of 2024 is looming. The ÖVP obtained only 21% of votes in the March 2024 polls against 37.5% in the previous 2019 general elections. Its coalition partner, the Greens, shares a similar fate and also lost some of its support (from 13.9% in 2019 to 8% in March 2024). The big winner of the polls is the national-populist FPÖ led by the controversial Herbert Kickl. The FPÖ has been leading the polls since November 2022 and would win 27% of the votes according to the same polls. The social-democratic SPÖ had some ups and downs in the polls and would, with only a 23% share of the votes, only gain 2 percentage points compared to the last election results.
The main problem after the election in the coming autumn will be the formation of a stable government coalition. Due to their extreme political differences, there can be no coalition of the FPÖ and SPÖ led by left-wing Andreas Babler. The latter also ruled out an often-used coalition with the ÖVP and the liberal Neos (10%). But without a third party, a combination without the FPÖ would fail to secure an absolute majority. At the same time, the ÖVP has ruled out a coalition with the FPÖ if Kickl remains leader. The “Beer party” could be a surprise element. The left-liberal party that was founded in 2015 as a joke by the frontman of a punk rock band is mainly active in Vienna. It will be standing for election to the National Council for the second time in 2024. Since the beginning of 2024, it has gained widespread support and was polling at 7% in March, above the minimum threshold of 4% to enter the Austrian Parliament. Political uncertainty ahead of the election is therefore running high, but Austrian political parties have always found a way to build a coalition in widely differing tie-ups despite their leaders’ initial reluctance. If the new coalition included the FPÖ, the Austrian government could turn away more from EU-projects and reduce investments in environmental projects.