Wifo and IHS Expect a Deficit of More Than 3 Percent

According to the forecast, the budget deficit last year was 4.1 percent (Wifo) and 4.0 percent (IHS) of the gross domestic product (GDP). Statistics Austria will publish the state's revenues and expenditures at the federal, state, municipal level, as well as in the area of social insurance carriers for 2024 next week, thereby officially announcing the overall state budget balance.

Wifo and IHS warn of a lost decade

If the US tariff conflict with the USA escalates further and heavily burdens the global economy, a fourth year of recession in Austria cannot be ruled out by the economists. In December, the economic researchers still expected economic growth in this country of 0.6 and 0.7 percent for this year, but now a decline of 0.3 and 0.2 percent is forecasted. The domestic economy developed by far the weakest in the EU comparison in 2024. In 2023, the real gross domestic product (GDP) in Austria shrank by 1.0 percent and in 2024 by 1.2 percent.

"Austria is in an economic crisis," said Wifo Director Gabriel Felbermayr at the presentation of the economic forecast in Vienna. The crisis is "partly structural" and "self-inflicted," the new federal government must tackle "bold structural reforms," such as in the area of pensions or federalism. The Wifo chief warned of a decade without economic growth, a "lost decade" in Austria, if the government does not act decisively. IHS chief Holger Bonin fully supports Felbermayr's "wake-up call." It requires "a package of ambitious reforms" and "a national effort." Austria has "largely in its own hands to solve the problems," Bonin explained.

Wifo: Several problem areas of the domestic economy

The Wifo chief pointed to several problem areas of the domestic economy. The real gross domestic product (GDP) per capita is expected to be 2.5 percent lower in 2025 than in 2019, but the available private income per capita 2 percent higher. "The crisis has not yet reached the average household," said Felbermayr. The stabilization of incomes was achieved through state transfers and high wage settlements. The industrial recession in Austria is particularly deep. The domestic industry is expected to continue shrinking in 2025 and fall back to the level of 2018, the Wifo chief expects. The industry has significantly lost competitiveness in recent years.

Both economists view the linkage of salaries and wages, rents, and social benefits in Austria to inflation critically. This is "an Austrian peculiarity" and brings "location disadvantages," said Bonin. The two economic researchers recommend that the public sector remain "cautiously" below the inflation rate for pension and salary increases in the coming years to advance budget consolidation. The union should also show some wage restraint in collective bargaining negotiations so that the economic engine can start again, the top economists explained.

Wifo and IHS see hard austerity pressure in the coming years

The budget deficit is expected to exceed the Maastricht threshold of 3 percent of GDP again in 2025 and, despite the austerity package, to be at 3.3 percent (Wifo) or 3.2 percent (IHS). "The budget consolidation by the new federal government dampens growth by 0.3 percentage points," calculates the Institute for Advanced Studies (IHS) in the economic forecast. To avoid further stifling the economy, the new ÖVP/SPÖ/NEOS government should implement the savings of 6.3 billion euros announced for this year, but not save even more, according to Wifo and IHS. An EU deficit procedure is "not a big deal," emphasized Felbermayr. For Bonin, "a pragmatic policy in crisis mode" is necessary.

Inflation hardly decreases according to Wifo and IHS

After the record inflation years of 2022 and 2023 with 8.6 percent and 7.8 percent, inflation fell to 2.9 percent in 2024 and is expected to be 2.7 percent (Wifo) or 2.9 percent (IHS) this year. The expiration of the electricity price brake, the increase in network charges for electricity and natural gas, and the increase in renewable energy subsidies and CO2 tax have significantly increased inflation in Austria at the beginning of 2025. However, the economic researchers expect a declining inflation rate over the course of the year. Inflation in Austria is still "too high" compared to the Eurozone, according to the Wifo chief. Inflation here is expected to be 0.5 percentage points higher than the Eurozone average this year, while last year the inflation rate was 0.6 percentage points higher than the Eurozone average.

Labor market "relatively robust"

According to Wifo economists, the labor market proves to be "relatively robust given the duration and severity of the recession." The IHS sees it similarly: "In historical comparison, the labor market situation is still quite stable." An increase in the unemployment rate by 0.3 or 0.5 percentage points to 7.3 or 7.5 percent is expected this year according to national calculations. IHS economists point to "significant downside risks" for the economic forecast. Political uncertainty has "increased significantly" since Donald Trump was elected US President. "Erratic changes" in international economic policy - including US tariff policy - make the forecast more difficult, according to Wifo. The German billion-euro financial package and the planned EU armament also increase forecast uncertainty additionally.

Wifo and IHS: Slight upturn could come in 2026

If the Austrian and global economy develop as currently forecast this year, the long-awaited upturn will come in 2026 according to Wifo and IHS. Economic growth is expected to be 1.2 percent or 1.1 percent next year. Inflation is forecast to significantly decrease to 2.1 or 2.0 percent in 2026, and the unemployment rate is expected to slightly decrease to 7.1 or 7.3.

(APA/Red)

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