In distress

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, Austria's 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-related business closures and international travel restrictions. The recovery in 2021 and 2022 proved relatively swift: Austria saw an upswing in annual GDP growth of +5% and +5.4%, respectively, 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. In 2023, financial tightening, weak global demand and high inflationary pressures dampened private consumption and uncertainty weighed on investments. This led the Austrian economy into recession, with a GDP contraction of -0.8% and an ambiguous development where manufacturing was in recession but services were still holding up. I2024 was a second year of recession as the country is grappling with a decline in investment and weak demand for capital goods and machinery. Exports to Germany, Austria's most vital trade partner, saw a notable drop in 2024, reflecting a longer-term trend. However, falling interest rates may soon improve financing conditions. In 2025, foreign demand is anticipated to recover slightly, providing some economic stimulus that could also boost private consumer spending. Nevertheless, overall growth will remain modest around +1%. Investment in equipment is likely to continue its downward trajectory due to deteriorating corporate earnings amid rising wages and commodity prices. Business insolvencies increased massively compared to pre-pandemic levels but after a peak in 2024 we expect them to drop by -8% year-on-year in 2025.

The cyclical downturn in economic prospects led to unfavorable developments in the labor market. In 2023, unemployment increased to +6.4% as the weak economic activity coincided with an expansion in the labor force. Looking ahead, the unemployment rate is set to continue to rise to +7.0% in 2025 as a result of a potential recession. Although wage growth has surged sharply, helping to offset purchasing power losses due to higher inflation, it took longer for wages to rebound from the impact of rising prices. While current wage growth in Austria remains robust, it has now passed its peak. Consumers continue to feel the pinch and this combined with escalating housing costs signalling broader economic issues has led to decreased consumer confidence and increased political dissatisfaction.

The Austrian business environment proves strong: the country scores very well in regulatory quality, rule of law and control of corruption. In addition to its strategic location in Europe and high-quality infrastructure, Austria offers a skilled workforce and robust legal framework.

In the 2024 elections, the FPÖ, with its anti-migrant and pro-Russia stance, won over many Austrian voters. It retained 76% of its 2019 voters and gained 25% from former ÖVP supporters, the largest voter shift in Austria's history. Additionally, it mobilized over 250,000 non-voters and captured 40% of those dissatisfied with the ÖVP-Greens coalition. However, ÖVP and SPÖ reject a coalition with FPÖ. In order to resolve this stalemate, the ÖVP was tasked with forming a government, but government formation is proceeding slowly. Austria will face general elections again in 2029.