Weak Growth with High Uncertainty

"While buoyant industrial economic activity still contributed to economic growth in 2022, industry will make a negative contribution to overall economic growth in 2023," says Christian Glocker, one of the authors of the current WIFO Economic Outlook.

After strong growth in the first half of 2022, the Austrian economy entered a phase of stagnation that will continue in 2023. Manufacturing and closely related sectors are now in recession, while market-related services are expanding overall. This dichotomy in the business cycle is not expected to abate until 2024.

The Austrian economy is in a phase of stagnation, which had already begun in the summer of 2022 and is expected to continue in 2023. Leading indicators, which at the beginning of the year had still pointed to a broad improvement in the economic situation, have recently deteriorated significantly.

The global economy is expected to remain weak over the forecast period. Increasingly tight monetary policy is worsening financing conditions, while fiscal policy is already weighing on economic activity in some countries. Stubbornly high inflation is also dampening private household consumption in many places. Nevertheless, there are no signs of a global recession, especially since energy prices, which had risen sharply in 2022 and dampened economic activity, have recently fallen.

Under these conditions, Austria's economic output is expected to stagnate in 2023 (+0.3 percent). The economic upswing of the previous years thus ends abruptly. Manufacturing and closely related sectors are now in recession, while market-related services are expanding. This dichotomy in the business cycle continues in 2023, but should weaken in 2024, leading to a pick-up in overall economic growth to 1.4 percent.

The economic weakness leads to an unfavourable development on the labour market, especially in 2023. Alongside moderate employment growth (+1.0 percent), unemployment is expected to increase year-on-year (+2.3 percent), as the weak economic activity coincides with an expansion in labour supply. In 2024, the unemployment rate is expected to decline (2023 6.4 percent, 2024 6.1 percent).

The projected slowdown in the business cycle is expected to have only a slow impact on prices. The inflation rate according to the Harmonised Index of Consumer Prices (HICP) will initially fall only slightly to 7.4 percent in 2023 (+8.6 percent in 2022). In 2024, inflation will moderate significantly to 3.5 percent, but will remain buoyant compared to the long-term average.