This document is a marketing communication.
Austria Watch: Endless recession or the end of the recession?
Compared to the euro area a tepid recovery will not materialize in the Austrian economy in 2024. Instead, another year of contraction is on the horizon. We now expect GDP to drop by -0.5% this year (previous forecast: +0.2%). Austria is once again one of the laggards of the euro bloc (incl. Germany, Finland, Baltics). Overall, the protracted economic weakness is not a European phenomenon, but an Austrian problem. Following two "lost years" GDP levels of mid-2022 — the previous peak — are not expected to be reached again until 2026.
Economy in Q2: Cold shower for Austria's economy
Since the beginning of the year, growth prospects for the Austrian economy have been continuously downgraded. The predicted upturn increasingly resembled a mirage. The industrial and construction sectors had long been expected to stabilize at best in the second half of 2024. Recovery hopes were pinned on private consumption. Its recovery, based on significant increases in real income in recent years, was expected to lead the economy as a whole onto a moderate growth path.
However, those expectations met the hard reality early September (release of final "hard" GDP data for Q2 4th September). Contrary to what was initially reported (flash estimate end of July) real GDP did not "just" stagnate in Q2, but posted a surprisingly sharp (quarter on quarter) drop of 0.4%. Recession in (residential) construction and industry continued as expected. Major unexpected disappointments had been private consumption (-1.1% qoq) and retail sales (-1.8% qoq). Given the disappointing H1 2024 as well as the current high propensity to save (= low propensity to consume), economic output is likely to shrink again in real terms in 2024 in the Austrian economy. Against this backdrop, we are revising our GDP call for the current year from +0.2% to -0.5% (2025: +0.9% instead of +1.4%). The domestic economy will be one of the economic laggards within the euro area for another year. Two years of recession in Austria are contrasted with two years of moderate expansion inside the euro area. Economic output in the euro currency bloc is set to grow in 2023 and 2024 (2023: 0.5%, 2024: 0.8%). The current protracted economic weakness in the domestic economy seems to be a homemade problem. Since mid-2022, Austria has clearly decoupled from the rest of the euro area. The negative "growth gap" is amounting to over 4% in real terms since then.
Why has Austria's economy been conspicuously weak since mid-2022?
Until mid-2022, Austria's economy was still mirroring broader European business cycle trends. Ups and downs of the economy caused by the lockdowns and subsequent loosening were largely in line with the rest of Europe. However, this changed from mid-2022 onwards. While the euro economy gained momentum slightly, excluding the heavyweight Germany — where a combination of cyclical and structural obstacles also has a negative impact — economic dynamism in Austria slipped further and further. Since the beginning of this "decoupling", Austria's economy has fallen short of the euro area GDP growth (excl. Germany) by more than 4% in real terms.
Austria is characterized by an industry-heavy economy. The latter does not bode well for a recovery given the headwinds facing European industry as a whole. However, the industrial sector only accounts for around 0.5 percentage points of the growth shortfall of around 3% up to Q1 24 (due to data availability of the components, only up to and including Q1 24). The negative growth contribution of the protracted residential construction recession, which is particularly pronounced in Austria, is somewhat larger (around 1 percentage point). However, the main contribution to the economic weakness comes from other sectors. Services (including exports of services) and, in connection with this, private consumption account for the largest share of the relative underperformance compared to the broader European economy. The hotel and restaurant/catering industry is a prime example. Value added in real terms in the tourism sector is still 16% (!) below pre-COVID levels (Q2 24 vs. Q4 19). No other major economic sector has performed worse since end of 2019, closely followed by retail trade. This sector generates 12% less in real terms than before the pandemic. The weakness in services is also reflected in exports. Although more services (including tourism) continue to be exported than imported, the surplus has recently fallen significantly.
What role does high inflation pay?
Overall, domestic economic weakness can be labeled as "price of inflation". Put simply, "inflation eats into growth". Since the start of the pandemic, it has become clear that the stronger the (sectoral) price increases do play out, the weaker the economic development of the respective economic sector. The hotel and catering industry is not only the sector that has seen the weakest growth since the pandemic (real value added: -16%), but is also the sector in which prices have been or had to be adjusted the most (+42% Q2 24 vs. Q4 19). Prices have also risen by over a third (+35%) in the hard-hit retail sector. Services are particularly labor-intensive and locally driven. That said the pronounced wage increases according to collective agreements in Austria compared to the euro area are likely partly responsible for the weakening economic dynamics in the Austrian economy and certain key sectors.
Has the high inflation of the last three years been "forgotten" after the recent "normalization"?
In August, consumer price inflation in Austria had reached it lowest level since April 2021 at 2.4% (preliminary data). Does this mean that the last three years of the inflationary state of emergency can be "forgotten" now? We would strongly disagree. Even if current price growth rates are back on a comparatively orderly path close to peers and ECB's inflation target, the higher price level remains. Since April 2021, consumer prices have risen by 21% in Austria and 18% in the euro area. This difference is not dramatic in itself, but the decisive factor is that while collectively agreed wages in Austria have risen at the same rate as inflation (21%), not all of the inflation has been compensated for inside the euro area (collectively agreed wages: +11%). The resulting labor cost and competitive disadvantage remains — even if the period of particularly high inflation in Austria is probably over. Moreover, the "danger" of renewed (excessively) high wage agreements is looming large. The rolling inflation rate for the last 12 months (Sep-23 — Aug-24), usually a key yardstick for wage negotiations among the stakeholders, is seen at 4.2%. This number largely reflects the past, but not the expected domestic inflation trend. Inflation will therefore be significantly lower at the time of negotiations of collective wage adjustments (autumn to spring 2024/2025).
Is the economic downturn also a consequence of the industry's reduced price competitiveness?
Austrian industrial companies have clearly lost international price competitiveness compared to their European competitors since the beginning of 2023 due to sharply rising wages. This has not harmed goods exports, at least in 2023. In the previous year, real exports of goods rose by 4% — more than in any other euro country; exports have only weakened in the year to date. How comes that Austria had been among the "European export champions" despite declining competitiveness? Export successes were paid for at the expense of profitability. Instead of passing on the (wage) cost increases to end customers abroad (the export price trend is in line with the European average), Austrian industrial companies have accepted lower profits. As a result, aggregated profitability of "corporate Austria" has fallen significantly in the last two years. Beginning of 2024 Austrian companies were even less profitable than the euro area average for the first time over the last decades. Relative export successes are or were therefore real, but are possibly not sustainable long-term. In addition, the drastic drop in profitability is reducing the scope for modernization and investment. The latter is alarming in times of major social and corporate transformation challenges (energy transition, green transformation, digitalization). In our opinion, falling profitability and (justified) concerns about the future of the industrial production in Austria are, in addition to the construction recession and its knock-on effects, a key driver of the remarkable domestic investment weakness (compared to the euro area) in the private sector. It goes without saying a protracted investment weakness could have a negative impact on long-term growth prospects (potential output growth).
Why has private consumption disappointed so far?
Private consumption was expected to be the bright spot in the Austrian economy in 2024. However, this expectation, does not stand up to reality. While real wages have risen noticeably instead of consuming the real income gain, it is being saved currently. The savings rate of households in Austria is now at its highest level since 2009 (leaving aside turbulent COVID-lockdowns). While it was the shut-down of the economy ("forced savings") that caused the savings rate to shoot up during the pandemic, increased fear about the future ("precautionary savings") are now driving the propensity to save. Households are quite positive about their own financial situation, but their willingness to make (larger) purchases is lower than ever before! This is hardly surprising, as Austrian households are not only much more pessimistic about the expected labor market conditions than in the previous year, but also more pessimistic than households in the euro area.
Austria: “prime example” of the negative effects of excessive inflation
All in all, the interrelated downward dynamics outlined are a "prime example" of the negative and complex consequences of sustained high and volatile inflation well above established inflation targets. We believe that the long-running and partly alarmist domestic debate about high inflation and the "perceived high inflation" in everyday life (keyword: mini consumer price basket for weekly shopping with a price increase rate of 14% yoy in 2022) have contributed to consumer uncertainty and weak consumer confidence. The effects of the difficult (competitive) situation in the domestic industry, initial negative labor market effects and insolvencies are now coming to the media and are further fueling the consumer restraint further. However, it is even somewhat surprising how drastic the "consumer strike" plays out — despite high wage increases — in a country that is (still) one of the wealthiest euro countries in terms of standard of living. Currently, Austria posted the fifth highest per capita income among euro area peers.
Going forward it would be very harmful if a prolonged "investment strike" were to follow. As already outlined, export successes have been achieved to date. However, these have come at the price of an ever-decreasing profitability and profit margins. From this perspective, the room for maneuver for investments is likely to be limited. This is all the more of a macroeconomic risk because gross fixed capital formation in Austria has been sluggish or negative since 2022. This is significant insofar as the Austrian economy has been characterized by solid or above-average investment activity compared to the euro area and Germany in the past. Therefore, over the last decade the domestic industry has been able to compensate for somewhat higher trend inflation in Austria by productivity gains. In this respect, the current subdued investment activity may entail further medium-term competitiveness risks (lack of productivity increases, relocation of production, further decline in international competitiveness).
What are short- and medium-term prospects? Risk of a "negative equilibrium"
Key sentiment indicators do not point to an economic turnaround in the domestic economy in the short-term. In the second half of the year, we expect stagnating to marginally improving economic momentum only. A more visible upturn will therefore be postponed (even) further into the future. Currently, we expect moderate economic growth for 2025. However, real GDP levels of mid-2022 — the previous peak — are not expected to be reached again until 2026. From an economic perspective, 2023 and 2024 are therefore "lost years" for the Austrian economy. Having said this, increased household savings represent an upside risk with a view into 2025. If household sentiment improves, savings could be channeled into consumption at a later stage and thus support the economy. For this to happen, however, the general economic sentiment would presumably have to improve.
However, even in the coming years — without drastic economic policy changes — there is a risk of "underperformance" compared to the euro area. If the trends outlined above will become entrenched, the domestic economy faces the threat of an economically sub-optimal or "negative" equilibrium characterized by high levels of uncertainty among households and companies, weak investment and low economic growth below or at best close to falling potential growth. Naturally, such a development would entail further and substantial risks on the fiscal side and for the welfare state.
Germany is currently and has long been characterized by the weakest economic development among the major and leading industrialized countries (G7). In this respect, the international debate about the economic "sick man Germany" is not surprising against the backdrop of economic headwinds and structural obstacles. In our opinion, somewhat below this perception threshold, Austria is currently developing into the "sick man of the euro area", where an interplay of economic and structural factors is also recognizable. With regard to the relevant key economic data discussed here (private consumption, private investment), Austria is currently among the laggards in the euro area, i.e. one of the weakest developing economies (in line with Germany, Finland or the Baltics). We do not believe that the weak consumption trend in Austria compared to euro area peers is due to a deliberately ideologically motivated decisions (e.g. by the younger population) not to consume. After all, this underconsumption motion is more of a Europe-wide phenomenon, not yet mainstream, and should not (yet) play a decisive macroeconomic role given the significance of private consumption in macroeconomic accounts.
Unfortunately, we still identify a rather low level of public/political awareness regarding the toxic mixture of cyclical and structural obstacles the Austrian economy is facing. This is especially true as other weak spots of the euro area economy such as Finland or the Baltic states are in some cases much more severely affected by the direct economic consequences of the war in Ukraine and the sanctions imposed on Russia. It is particularly alarming and needs to be scrutinised that Austria is performing the worst in terms of private consumption - despite high wage increases - of all the euro economies that are currently stagnating. In view of the upcoming wage negotiations and elevated savings, it is therefore important to question whether renewed wage increases in the region of 4% plus will really offer support to private consumption and the overall economy. Possibly negative trends in international price competitiveness and investment momentum has to be watched as well. Not to forget the backdrop of a labour market that remains tight and not very dynamic. National economic policy measures are all the more important as the European level and ECB (cautious interest rate cuts, continued restrictive monetary policy) are unlikely to provide any supportive impetus in the coming 6-12 months. Possibly, the monetary policy stance of ECB is too restrictive for the Austrian economy, a phenomenon that was also characterizing the German economy in the early 2000s. Back then Germany embarked on ambitious structural (labor market) reforms.
Post 
Email
Gunter DEUBER
Austria Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.
Matthias REITH
Austria Matthias Reith is an economist at the Economics and Financial Analysis division (Raiffeisen Research) of Raiffeisen Bank International (RBI) in Vienna and looks back on more than 10 years of analytical experience at RBI. Then as now, he is the responsible analyst for the Austrian economy, and in 2020 he played a key role in setting up the Austrian regional real estate research. Furthermore, Matthias also has an eye on other euro area countries as well as on the monetary union as a whole, focusing on the business cycle and in particular on fiscal policy. Matthias has several years of experience in lecturing and presenting.
Austrian banks have posted bumper profits in the last two years according to various metrics. Calls for the taxation of ‘excess profits’ have been raised in the public recent weeks. The debate is very much focussed on the short-term profit development. However, the long-term economic perspective, the challenging last decade for European and Austrian lenders, the sobering economic framework conditions in the Austrian economy plus the banking business outlook suggest a more differentiated view in regard to supposed ‘excess profits’. |
Despite certain incentives (e.g. elevated euroization), eastward expansion of the euro is no fast-selling item. In fact, recent economic shocks caused substantive divergence between the euro area and CE/SEE countries. Additional stumbling blocks are political frictions between EU institutions and some candidates, while ECB sees the quality of public institutions in some cases as weak. In local politics, euro planning is not a winning strategy in some places either. We continue to see Romania as likely the next and distant euro entrant before the mood in Czechia and Poland perhaps allows for it too. Hungary seems the furthest away from credible EUR perspectives. Given current starting positions (i.e. non-fulfillment of entry criteria across the board) and elevated macroeconomic volatility, we hardly expect the next euro entry to materialize until 2030. |
As of mid-2024 our expectations for a muted, consumer-driven recovery in Europe are confirmed. More countries entered a (cautious) monetary policy easing phase. In the presentation attached, we also look at the investment cycle, long-term CEE FX dynamics, and NGEU progress. |
EU's expansion into Central Europe (CE, 2004) has been an economic success story at the macroeconomic level. This holds true despite certain twists and tweaks. Ballooning foreign trade and FDI have led to a sustained economic and income catch-up vis-a-vis Western Europe. In banking, catch-up trends are somewhat more complex. Overall, THE "Convergence Winners", if macroeconomics and banking are taken as a benchmark, are presumably Czechia and Slovakia. On an interesting note both countries pursued very differing strategies, paired with a few underlying similarities. Austrian banks remain a dominating force in CE (market share 25%). Going forward the CE region can benefit from the successes achieved and current geo-economic trends — if it can avoid being in its very own corner. |
Aside from the humanitarian tragedy in Ukraine, the economic consequences of the war in Ukraine are manageable in the short and medium term, both in Europe and globally. However, the emerging "great power rivalry" with Russia in Europe implies long-term investment requirements that the EU hardly seems able to meet in the current setting. Mutually financed (national) investments in the defense sector should be worth considering - if we accept the lessons of history and are serious about defense spending of 3-4% of economic output (in large EU countries). |