Modest recovery in 2024, after almost stagnating in 2023
The economy will probably stagnate in 2023. Activity slowed in the first half of the year, but is expected to gradually recover in the second half. The reason for this wobbly outlook is the diametric development between the manufacturing sector, which has been in a recession since mid-2022 due to very poor demand from its main export destination Germany, and strong momentum in services, especially in financial and economic services, and tourism. The 2022-2023 winter ski-season was very successful (only 5% below the record season of 2019). In 2024, the manufacturing sector should progressively display a hesitant recovery in line with a mild recovery in Western Europe, including fledging recovery in Germany, and, on the other, service sector activity should further increase due to even stronger demand from tourism and gastronomy. Together, this will further sustain economic activity in 2024.
On the demand side, private consumption put a brake on economic activity in 2023, but should make a noticeable comeback in 2024. Austrian collective wage agreements are almost automatically indexed to the pace of inflation over the previous twelve months. In 2022, collective wages increased by 3.1%, and, together with a strong increase in employment and with many state support measures, the Austrian Central Bank estimated that real disposable household income had reached +0.6%. In 2023, wages should increase by 7.6% (the considered GDP-deflator). However, with less state support, and wage increase only balancing out consumer prices, private consumption has decreased and is only shored up by a decrease in the household savings rate. In 2024, the interaction between inflation and wages should reverse and drive consumption despite an increase in the private savings rate. Inflation is expected to ease further but is likely to still hover around 3.8% at the end of 2024 due to its sticky services component, while collective wages should increase by 6.5%. The European Central Bank (ECB) has reacted to the high level of European inflation. Between January and July 2023, it increased its key marginal lending rate four times by a total of 175 basis points to 4.25%, placing it at one of the highest levels in the central bank’s history. With Austrian and European inflation on the decline, the ECB should adopt a “wait-and-see” attitude. The first rate cuts are not likely before mid-2024, however. In terms of quantitative easing, the ECB already stopped the reinvestments of its APP program in July 2023. Maturing paper in its Pandemic Emergency Purchase Program (PEPP) have been fully reinvested until at least the end of 2024. This unusually high interest rate keeps the momentum of private and corporate investments low. Equipment and housing construction investments should remain negative in 2023 and only partly be balanced out via Research & Development, and other construction investments. In 2024, on back of hesitant recovery in the manufacturing sector, equipment investments will be needed, while housing construction should keep to its downward trend due to the high financing costs in combination with pricy materials and a lack of skilled workers. Meanwhile, the public sector has switched bank to its austerity path, which will have a negative (in 2023) or probably a neutral impact (in 2024) on economic growth. Some positive signs are emanating from foreign trade, where exports should trend more favourably than imports in 2023 and 2024 thanks to services.
Declining budget deficit and rising current account surplus
In 2023, we expect the current account surplus to have probably picked up and increase further in 2024. One main driver is the services surplus that will increase thanks to strong inbound tourism. Moreover, the trade in goods balance should improve further in 2024 thanks to enhanced terms of trade, while increases in both export and import volumes should level each other out. The deficit in the balance of investment income should remain without major changes, which should be also the case for the structural deficit of the balance of transfers.
The public budget should remain in deficit for the fifth year in a row in 2024. While the introduction of inflation indexation on income tax will decrease the revenue from 2023 onwards, the Covid-19 related support measures have already decreased markedly in 2023 and will do so further in 2024. In addition, energy-price related subsidies (such as the electricity cap) will terminate in the summer of 2024, thereby bringing down the deficit further. The weight of public debt as a share of GDP will probably decrease further due to a combination of limited public deficits and strong nominal GDP growth.
Round robin in the polls before the general election in 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 Since December 2021 (holding 71 out of 183 seats in Parliament) and the Greens (26 seats). Nehammer is the successor to Alexander Schallenberg (who was acting as interim chancellor for some months only), and before him, Sebastian Kurz (both ÖVP). Kurz stepped down and lelft the political landscape after a corruption scandal in October 2021. Since then, the ÖVP has lost much support in the public opinion stakes and obtained only 23% of votes (in third place) in the polls of summer 2023 against 37.5% in the last general elections held in 2019. The coalition partner, the Greens, has also lost some of its support (from 13.9% in the election to 10% in summer 2023, placing fourth), which throws doubt on the current government coalition holding onto office after the next election scheduled for the autumn of 2024. The national-populist FPÖ, with its controversial leader Herbert Kickl, has been leading the polls since November 2022 and would win 28% of the votes according to the same polls. Second in the polls is the social-democrat SPÖ party, which has lost support due to internal rifts (its share of support was 24% in the polls of the summer of 2023). The election of the new SPÖ party leader in spring 2023 should have eased tensions, but had only limited success owing to the chaotic election process. In the end, Andreas Babler from the left wing of the party held the lead. While it is clear there will be no coalition between the SPÖ and FPÖ under Babler, he also ruled out an often-used coalition with the ÖVP and the liberal Neos (10% of the polls). At the same time, the ÖVP has ruled out a coalition with the FPÖ as long as Kickl is leader, as well as with the left KPÖ (which gained 4% at the polls; Austria imposes a 4% threshold to enter Parliament). This means that three-party coalitions without two of the bigger parties (FPÖ, SPÖ or ÖVP) would not have enough support to form a majority coalition. Political uncertainty ahead of the election is 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 includes the FPÖ, the Austrian government would turn its back more on the EU and reduce investments in environmental projects.