OeNB Report 2025/11: Tentative recovery after prolonged recession – pressure for reform is mounting

Economic Outlook for Austria from 2025 to 2027 (June 2025)

Gerhard Fenz, Bernhard Graf, Doris Prammer, Lukas Reiss, Alfred Stiglbauer and Klaus Vondra ¹

External headwinds and structural domestic weaknesses are a significant drag on the recovery of the Austrian economy. Austrian industry continues to face fundamental competitiveness problems which have become even more challenging in view of increasing uncertainty in trade caused by US import tariffs. In this outlook, we assume that the tariffs that were in force on May 21, 2025, will remain in place going forward: 10% tariffs on all exports to the US with exemptions for certain categories of products and no EU retaliatory tariffs.

The Oesterreichische Nationalbank (OeNB) expects Austria’s real GDP to grow at a rate of 0.2% in 2025, following two years of recession (2023: –1.0%, 2024: –1.1%). Consequently, Austria is emerging from its longest recession since 1945. However, the economic recovery is expected to remain weak by historical standards. The OeNB forecasts that GDP will expand at a moderate rate of 0.9% in 2026 and 1.1% in 2027. Austrian GDP will not return to its pre-crisis peak of mid-2022 until after 2027.

Industrial production surprised to the upside at the start of 2025, but the Austrian economy is facing fundamental competitiveness problems. This is largely the result of an ongoing loss of price competitiveness in both industry and services. Output in core segments of Austrian industry, such as mechanical engineering and vehicle construction, has undergone an extended decline. Tourism, a crucial part of the services sector, has been affected by recent above-average price increases. Overall, competitiveness is expected to stabilize over the forecast period, but there is no improvement in sight. At the same time, private consumption remains subdued: Consumers remain relatively cautious about the economic situation and outlook in Austria. Until the end of 2027, the saving ratio will remain well above the average level seen from 2012 to 2019. Accordingly, private consumption will be making a below-average contribution to the overall economic recovery. Growth will also be weighed down by fiscal consolidation; the measures to be implemented by the new Austrian government will have a slightly negative effect on growth in the short term. In addition, the Austrian economy will derive little benefit from increased military and infrastructure spending in other countries such as Germany in the forecast period up to 2027.

The Austrian labor market has so far remained resilient despite the ongoing weakness of the economy. Many companies are holding on to their employees after having experienced shortages of skilled workers in recent years. At the same time, labor supply is growing at a subdued rate, given an aging population. Nevertheless, the OeNB expects unemployment to continue increasing in 2025, albeit at a moderate rate. The situation is expected to start improving only in 2027, when the recovery slowly starts to take hold.

Austrian HICP inflation will run at 3.0% in 2025, almost unchanged from the previous year (2.9%). The main drivers remain persistently high services inflation and a significant increase in prices for energy, especially for households, at the start of the year. Energy prices also remain the key driver of inflation over the forecast horizon. While oil prices and wholesale prices for electricity and gas have fallen significantly, this effect has been largely offset by the phaseout of government support measures, such as the electricity price cap. In addition, the energy price declines will pass through to households with a delay, and their full disinflationary effect will not be felt until 2026. Hence, energy prices will contribute to headline inflation in 2025 and help slow inflation in 2026. At the same time, services inflation will gradually moderate over the forecast period. Overall, HICP inflation is expected to decline significantly, to 1.8% in 2026 and edge up to 2.1% in 2027.

The Austrian general government budget deficit will narrow by 0.5 percentage points, resulting in a budget balance of –4.2% of GDP in 2025. The improvement reflects the new government’s consolidation measures. These include the abolition of the “climate bonus” payments, cuts to subsidies and increases in fees, taxes and social security contributions. The measures included in the 2025–2026 budget, coupled with better growth prospects, mean that the budget balance will further improve to –3.8% in 2026, before deteriorating slightly in 2027, to –4.0%. These numbers are based on a no-policy-change assumption: Consolidation measures that the government has only announced without providing any details were not included in the outlook.

The OeNB’s economic outlook is subject to considerable uncertainty due to the tariff and trade conflict started by the US administration. Economic conditions could change significantly owing to the introduction of tariffs on US imports from the EU, potential retaliation by the EU and a redirection of global trade flows from countries like China. In box 1, we describe two scenarios in addition to the one underlying this outlook to illustrate what this uncertainty means in terms of possible outcomes.

The negative scenario assumes a further significant increase in US tariffs in the summer. In the positive scenario, the tariffs will be mostly lifted. The impact on Austria outlined here is based on the assumptions and estimates of the June 2025 Eurosystem staff macroeconomic projections for the euro area. A continued increase in US tariffs would reduce Austria’s GDP by about 1% by end-2027 compared to the scenario underlying this outlook. The impact on inflation is negative but marginal. A reduction in tariffs, by contrast, would increase GDP by 0.5 percentage points by end-2027 and raise inflation by 0.4 percentage points.

Other risks to the economic outlook relate to domestic factors. Additional fiscal consolidation efforts could weigh on growth, particularly in 2027. Potential upside risks are limited: The household saving ratio could decline to its historical average of 7.6% (2012–2019) more quickly than expected, significantly stimulating private consumption and boosting growth by a cumulative 0.7% until 2027.

However, these upside risks are outweighed by downside risks. Ongoing geopolitical tensions – particularly in Ukraine and the Middle East – have been weighing heavily on the global growth outlook. Overall, the risks to GDP growth are clearly tilted to the downside. In comparison, the inflation outlook is subject to significantly lower risk.

1 Global uncertainty and declining competitiveness weigh on export recovery

Austria’s external environment has recently become particularly challenging: While global trade growth was near zero in 2023 and picked up markedly in 2024, total Austrian exports shrank by 3.6% in 2024. The Austrian export sector has been dragged down by a significant decline in competitiveness and keeps losing global market share. Demand has been dampened not only by the sharp rise in energy and unit labor costs in Austria, but also by the external economic environment, particularly the recession in Germany. Other EU countries and the euro area as a whole have likewise only seen a gradual increase in growth rates. Most recent data suggest that the erratic trade policy of the US administration and the associated uncertainty in trade policies and financial markets entail a significant reduction in the growth outlook for the US economy, which contracted in the first quarter of 2025. Overall, these factors indicate that Austrian exports will continue to decline in 2025, at a rate of 1.2%. Export growth does not resume until the following years, with increases of 1.3% in 2026 and 2.3% in 2027.

As regards unit labor costs, annual growth was, on average, 1.2 percentage points higher in Austria than in its most important trading partner, Germany, and 1.7 percentage points higher than in the euro area during the COVID-19 pandemic and in subsequent years (2020–2024). While the situation will improve significantly in the forecast period (2025–2027), it will not reverse the losses in competitiveness. Unit labor costs will be growing at an average annual rate of 2.5%, roughly matching the pace in Germany (+2.6%) and the euro area (+2.3%).

The appreciation of the euro against the US dollar by more than 9% since the beginning of 2025, combined with the introduction of US import tariffs on goods, has further eroded price competitiveness. ² This is reflected in Austrian companies’ assessments of their competitive position within and outside the EU, which remain extremely negative. Austria will lose a further 5.1% in market share between 2025 and 2027. The steep decline will be halted, but not reversed in 2026–27.

Real imports of goods and services dropped by 3.3% on the back of the significant decline in import-intensive demand components (exports: –3.6%; investment: –2.3%) in 2024. In 2025, import growth will be flat given the contraction in total exports. It is not before 2026–27 that imports are expected to pick up again. This results in a current account balance of 1.8% of nominal GDP in 2025, 1.9% in 2026 and 2.0% in 2027.

Faced with the military threat from Russia, European countries have announced comprehensive rearmament investments. Together with Germany’s plans for infrastructure investments, this will result in a significant fiscal stimulus. However, due to the lagged effects of both defense and infrastructure projects, this stimulus will only build slowly over the forecast horizon. According to ECB estimates, the cumulative effect of this fiscal stimulus will amount to 0.2% to 0.3% of euro area GDP from 2025 to 2027. The Austrian economy will benefit only somewhat, given that infrastructure investments typically have a low import content and Austria does not have a significant defense industry. Using a global input-output model, we estimate that the effect on Austrian GDP will only be 0.04% in 2026 and 0.08% in 2027.

2 Ongoing problems in industry hinder investment recovery

Overall gross fixed capital formation fell by 2.3% in 2024. In residential construction investment, the decline was particularly pronounced at 7.4%, continuing the very steep downward trend of 2023. Investment in research and development, which is less sensitive to the business cycle, was the only category that recorded growth, expanding by 2.2% in 2024.

The industrial sector’s difficulties continue to weigh on corporate investment in plant and equipment. Firms reduced their investment significantly because of weak external demand and a substantial rise in costs driven by higher energy prices, strong wage growth and financing costs that went up until mid-2024. The number of insolvencies rose sharply in 2024, highlighting the difficult situation businesses have been in. 6,454 businesses were declared insolvent, which represents a 23% increase over the previous year. This is consistent with the Austrian results of the March 2025 bank lending survey , which show that demand for corporate loans has decreased in the past two and a half years, mainly reflecting a decline in corporate demand for financing. However, for the first time since mid-2022, the banks surveyed were cautiously optimistic about the months ahead. They expect a slight increase in demand for corporate loans in the second quarter of 2025. The OeNB forecasts investment in plant and equipment to grow very slowly, lagging far behind historical cycles given the exceptionally high levels of uncertainty related to US tariff policy and the difficult situation of the Austrian industrial sector. No other demand component reflects the current uncertainty to this extent.

Residential construction investment started to decrease in mid-2022 as a result of increased financing costs, the end of the residential construction boom and economic weakness; in 2024, it was down 19% from 2024 levels. Most recent data point to a rebound in demand for residential real estate loans that will gain further momentum in the course of 2025 as recent monetary policy interest rate cuts are passed on to bank lending rates. At the same time, sentiment in building construction has started to improve, with firms assessing both construction activity in the past three months and order books less negatively than a couple of months ago. The housing stimulus package adopted by the previous government will likely provide an additional boost. We therefore expect a slight recovery in residential construction to kick in during the second half of 2025, while residential construction investment will not expand until 2026 (by 1.0%). Investment in research and development is the investment component with the highest growth rates in the past two decades and remains robust, having expanded in 2024 and continuing to grow over the entire forecast horizon.

Overall, the OeNB expects total investment to shrink slightly in 2025, by –0.5%, and to recover only moderately – by an average 1.2% p.a. – from 2026 to 2027.

3 Unemployment rises slightly – decline in wage growth expected

The ongoing recession has been the reason for the slow, but continuous increase in unemployment in Austria since early 2023. The unemployment rate (national definition) will continue to inch up in 2025 compared to the previous year, reaching 7.4% (table 4), and remain unchanged in 2026. In view of the long recession, this is a modest increase; the unemployment rate also stood at 7.4% in 2019, the year before the COVID-19 pandemic. Unemployment is expected to move sideways, reaching 7.2% in 2027. The unemployment rate according to Eurostat’s definition will also peak in 2025–26 (at 5.4%), before standing at 5.3% by the end of the forecast horizon. The number of hours worked will contract only slightly, by 0.3%, in 2025, following the 1.3% slump in 2024. It is expected to increase at a moderate rate of 0.3% in 2026 and to rise by 0.6% in 2027. Employment growth will continue to stagnate in 2025 (+0.1%) and pick up in 2026 and 2027.

Most collective bargaining agreements for the 2024–25 negotiation round have been concluded. On this basis, we can predict with a high degree of certainty that collectively agreed wages will grow at 3.8% in 2025, a rate significantly below the 8.5% of the previous year. Collectively agreed wage hikes have trended down since the beginning of 2025, as was to be expected due to the decline in rolling inflation, which typically serves as the basis for negotiations. In February, collectively agreed wages and salaries in the electricity sector and the oil industry rose by 3.4%. This was followed in March by an agreement for the insurance industry (3.4% for office-based staff and 3.6% for field staff). The hikes in collectively agreed wages in April and May included: +3.3% in private hospitals, +3.5% in the textile industry, +3.0% in the financial sector, +3.1% in private educational institutions, +3.9% in the hospitality industry, +2.7% in the chemical industry and +2.6% in the construction and the paper industries.

Negotiated wage growth will drop to 2.1% by 2027, a level that is slightly below the long-term average (1995 to 2022). Compensation per employee will increase by 3.6% in 2025, at a pace that is significantly lower than growth in collectively agreed wages (negative wage drift). Wage drift will remain in negative territory at –0.3% in 2025 but turn slightly positive in 2027 at +0.1%.

4 Continued consumer restraint despite robust real income growth

Austrian households saw their real disposable incomes increase sharply in 2024. This was mainly due to the lagged rise in wages and pensions after the inflation shock. Overall, real disposable income growth came in at 3.4%. At the same time, private consumption was weak (+0.3%). Rising incomes and nearly stagnant consumption resulted in a significant increase in the saving ratio.

Chart 1

Household confidence indicators ⁶ continue to point to consumer restraint. It appears that household sentiment has been more sensitive to the recent episode of high HICP inflation than to increases in real disposable income. Another possible factor is the erosion in the real value of aggregate financial assets. As shown in the OeNB’s March 2025 Interim Economic Outlook , a simple linear extrapolation of growth in households’ real financial assets (2012–2019 trend) demonstrates that the inflation shock led to a significant erosion of wealth in 2022 and 2023. At the end of 2024, households’ real financial assets were still 10% below the extrapolated trend.

Real disposable household income is expected to decline by 0.9% in 2025. Combined with a moderate recovery in private consumption, this will reduce the saving ratio.

In 2025 in particular, fiscal consolidation measures will slow growth in nominal household income, primarily due to the abolition of the “climate bonus” payments (–0.8 percentage points) and adjustments to welfare benefits (–0.4 percentage points). Private consumption is expected to increase at a stronger rate than real disposable household income in 2027.

Nevertheless, at 9.6%, the saving ratio will remain above its historical average at the end of the forecast horizon. A sharper decline to the average of 7.6% (2012–2019) would increase cumulative growth by 0.7%, representing an upside risk to the forecast.

5 Highly volatile inflation from 2025 to 2027 – inflation to meet target in 2026

The OeNB expects inflation to be 3.0% in 2025, slightly above the 2.9% recorded in 2024. This is mainly due to continuously high services inflation rates and energy prices, notably household energy prices, which have risen considerably in the year to date. Energy prices will continue to drive inflation developments (red-brown columns in chart 2). In particular, falling energy prices will slow inflation to 1.8% in 2026. In 2027, inflation will stabilize at 2.1%, and energy will no longer be a contributing factor.

Chart 2

The considerable increases in prices and charges that are part of the government’s consolidation efforts only have a moderate effect on inflation because of the affected services’ small share in the consumption basket. These hikes concern, e.g., charges for new passports, KlimaTicket public transport passes, charges for electronic health insurance cards (e-cards) as well as tobacco taxes. Specifically, these measures will only contribute 0.15 percentage points to inflation in 2026.

Core inflation (HICP inflation excluding the volatile food and energy categories) will fall to 2.9% in 2025, down from 3.9% in 2024. After that, core inflation will come down more slowly than HICP inflation. This is because prices of energy, a category excluded from core inflation, are expected to see a sharp decline. While services inflation will only be decreasing slowly, the growth of prices for industrial products such as clothes and furniture will be rising. Therefore, at 2.3%, core inflation will exceed headline inflation in 2027.

As inflation relief measures were wound down, energy inflation rose sharply in early 2025, surging from –7.8% to +5.2% from December 2024 to January 2025. This was mainly attributable to the expiry of the electricity price cap, the adjustment of electricity and gas levies and the reintroduction of the flat levy and the fee for the promotion of renewable energy. Moreover, electricity and gas network charges were raised, and the price of CO2 emissions was increased from EUR 45 to EUR 55 per tonne. These measures will continue to have a noticeable impact for the remainder of 2025.

Hence, energy inflation will remain at 4.6% overall in 2025, even though wholesale prices for electricity and gas are expected to drop by around 20% in the course of the year.

The decrease in wholesale and consumer prices will be reflected in the inflation rate not before 2026. Annual average energy inflation will be –5.6% in 2026 and will even fall to –10% in early 2026.

This is mainly attributable to the base effect, which reflects the absence of one-off effects that had determined the price level in the previous year. Since inflation is measured on a year-on-year basis, the sharp price increase in early 2025 will no longer impact inflation in 2026. If no further price changes occurred from January 2025 onward, inflation would be 0% at the start of 2026. In practice, the OeNB expects falling consumer prices: First, falling wholesale prices are being passed on to consumers (albeit slowly). Second, the OeNB expects that the rise in electricity and gas prices in early 2025 will make significantly more households switch to lower-cost suppliers. In the first quarter of 2025, this assumption already proved to be true. ⁷

Energy prices are expected to rise again in early 2027, owing to the implementation of ETS2 ⁸ , a new EU-wide emissions trading system covering fuels and household energy. In Austria ETS2 will only have moderate effects, however, since the targeted EU-wide carbon price is only slightly higher than the current national price. Decreasing wholesale prices will also have a dampening effect. Overall, 2027 energy prices will remain at the level of 2026, with energy inflation at a low –0.2%.

Even though services inflation will decrease by around 1.5 percentage points to 4.1% in 2025, services will remain the main driver of inflation (chart 2). The service sector is particularly wage-intensive, which is an important reason why rising wages have a stronger effect on service prices than on other HICP components. Negotiated wages in services are expected to grow by 3.8% in 2025. Demand for services remains high, in particular in the tourism industry. It can therefore be expected that higher costs will be passed on to consumers. For this reason, services inflation will only decline slowly and in line with the gradual slowdown in wage growth.

The price increases included in the latest fiscal consolidation package mainly concern services. The price hikes will be highest for passports and driver’s licenses (around 48%). Furthermore, the price of the KlimaTicket public transport pass will be raised twice: by 19% in 2025 and by another 8% in 2026. Moreover, the charges for e-cards, the Austrian health insurance card, will almost double.

Since many of such consolidation measures will only enter into force in the second half of 2025, they will have a marginal impact on services inflation in 2025 as a whole (less than 0.1 percentage points). For 2026, however, we expect a more pronounced effect, that is, a contribution of around 0.2 percentage points to services inflation.

The inflation rate for non-energy industrial goods (e.g., furniture, cars and clothing) will temporarily fall to 0.7% in 2025. Producer prices will remain stable due to falling energy prices and largely constant prices of non-energy commodities. To a great extent, these stable prices will be passed on to consumers. This is because since the COVID-19 pandemic, demand for durable consumer goods has become largely saturated and remained moderate. The OeNB thus expects that prices will only start to rise when current weak demand for industrial goods picks up again. In 2026, the projected economic recovery will slightly increase inflation for non-energy industrial goods. At 0.9%, however, it will remain below the long-term average of 1.2% (1998–2024).

Food price inflation (including alcohol and tobacco) will decline slowly in 2025 and 2026. Only in 2027 will it drop to 2.2%, a level below the long-term average of 2.5% (1996–2024). Prices for both processed and unprocessed food have continued to rise. The slowdown in the growth of prices for processed products, which include tobacco, will be hampered by the increase in tobacco taxes envisaged for 2026. This tax hike will contribute around 0.4 percentage points to inflation in this category in 2026, leading to an increase in overall food inflation by 0.3 percentage points. This will largely offset the disinflationary impact of decreasing energy prices and more moderate wage increases. A significant decrease of food inflation is only expected for 2027: By then, the tax-induced base effect will no longer feed into inflation, while prices for energy and non-energy commodities will continue their favorable trajectory.

Revisions

The only part of this outlook affected by a major downward revision compared to March 2025 is the inflation outlook for 2026 (table 6). This revision was mainly attributable to falling commodity prices and the strong euro. Compared to the March forecast, we lowered our assumptions for oil prices by around 15%. Similarly, we revised down our assumptions for wholesale gas and electricity prices by 10% to 20%. The US dollar has lost more than 7% against the euro since March, which has further reduced import prices, especially for oil. Together, these developments will result in energy inflation being substantially lower in 2026 than expected in the spring outlook.

Our inflation forecasts for the years 2025 and 2027, by contrast, remain almost unchanged in comparison to the March 2025 estimate. That said, for 2025, we see a significant shift within the individual components of inflation that can be ascribed to newly available inflation data. This shift is particularly pronounced in energy prices: Prices for household energy did not decrease as much as expected during the first four months of 2025. As a consequence, the energy component of the 2025 inflation forecast was revised upward.

Risks

The impact of the trade war on inflation in Austria is complex and transmitted through several channels. The imposition by the US of tariffs on EU exports, possible retaliatory measures by the EU (vis-à-vis the US) and the resulting trade diversion (e.g. from China) have far-reaching economic consequences.

These factors have been included in the OeNB’s forecast, as described in box 1, and feed into the inflation forecast through our assumptions about commodity prices, exchange rates and Austria’s economic growth. The baseline scenario does not include an estimate of possible changes of prices for US imports due to EU retaliatory tariffs.

Our estimates show that high US tariffs and EU retaliatory tariffs have a slightly dampening effect on inflation overall (box 1, negative scenario). It seems that the negative effects of a weaker economy (including lower commodity prices), financial market effects (including an appreciation of the euro) and confidence effects outweigh direct price increases of US imports due to tariffs. However, the economic recovery assumed in the positive scenario (box 1) would contribute to higher inflation.

Inflation differential vis-à-vis the euro area

Chart 3

Energy prices are not only an important driver of inflation in Austria, they also have a large impact on the inflation differential between Austria and the euro area (chart 3).
While many euro area countries already ended price-dampening fiscal measures in early or mid-2024, Austria kept these measures in place until the end of 2024. As a consequence, the difference in energy inflation increased when the measures expired. Thus, other countries have already benefitted from falling energy commodity prices, whereas in Austria, this effect has been overshadowed by the late winding down of fiscal support measures. In 2026, however, this base effect will no longer be relevant in Austria, and, as a result, energy inflation at home will be substantially more in negative territory than in the euro area. In 2027, the EU-wide implementation of ETS2 will impact the inflation differential vis-à-vis the euro area. Since Austria already introduced carbon pricing in 2022, energy inflation will not increase as much as in the euro area. Moreover, the decrease in services inflation will contribute to a closer alignment of inflation rates between Austria and the euro area in 2027.

6 Budget deficit remains very high despite extensive consolidation efforts

In 2025, the budget balance improved by about half a percentage point to –4.2% of GDP (black line in chart 4). Without the new government’s fiscal consolidation measures, the deficit would be approximately –4.9% of GDP in 2025. Hence, the fiscal path is very restrictive: Total consolidation amounts to about 1.3% of GDP in 2025 (light blue columns). Around half of that amount is attributable to consolidation measures adopted by the new government (about EUR 4 billion or 0.8% of GDP; see table 7). These include the abolition of “climate bonus” payments, reductions in subsidies as well as increases in taxes and social security contributions.

Cuts in government consumption and investment only account for a small amount.
In total, the 2025 fiscal consolidation package will only have a small dampening effect on economic growth (0.2 percentage points).

The end of temporary measures implemented to dampen energy price inflation (electricity price cap, reductions in energy-related taxes) also contributes to consolidation.

Chart 4

However, deficit reduction efforts are being challenged by several factors in 2025: Ongoing weak economic activity weighs on tax revenue growth (green columns). Moreover, interest expenditure is increasing, while revenue from the EU budget and dividends is down (parts of the dark blue columns).

In 2026, consolidation will amount to 0.9% of GDP (light blue columns). About half of this effect is attributable to the new government’s consolidation measures, the other half to the winding down of measures introduced by the previous government. At the same time, economic recovery will improve the budget outlook somewhat (green columns). As a result, the budget balance will improve to –3.8% of GDP in 2026.

According to its current budget plan, the federal government will be taking further consolidation steps in 2027. However, these measures have not yet been sufficiently specified and are therefore not part of this outlook. Accordingly, the consolidation effect is forecast to be only slightly positive in 2027 (light blue columns). Furthermore, a statistical one-off effect will contribute to a deterioration in the budget balance to –4.0% of GDP: Revenues from the national carbon tax are recorded at the time of emission; this system will be phased out at the end of 2026. In 2027, the new EU-wide system – ETS2 – will enter into force. Tax revenue from this new system, however, will only be recorded ex post, i.e. from 2028 on. As a result, in 2027 we will see a statistical loss in revenue of about 0.3% of GDP (part of the dark blue columns).

The debt ratio was 81.8% of GDP in 2024; in 2025, it will increase to 84.2%, and in 2027, even further, to about 86.6%, as moderate nominal GDP growth during this period will not suffice to compensate for high budget deficits.

7 Annex of tables