Economic growth supported by solid household consumption

After a deep recession in 2020 triggered by the pandemic, the Austrian economy partly rebounded in 2021. The export-oriented economy benefited from the revival of global trade and its intensive business links with Germany and Central & Eastern Europe. In 2022, foreign exchange was expected to progress further, thanks to the recovery of the leading European partners. However, the contribution of net exports to GDP growth will be marginal due to the almost equal improvement in imports. Domestic demand should be the driving force of the economy in 2022. Household savings accumulated during pandemic lockdowns will be directed towards private consumption, although the total increase is unlikely to be channeled into it in 2022. Such a trend has already been observed, as the gross household savings rate reached 14.8% of disposable income at the end of 2019, peaked at 24.5% at the end of 2020, then decreased to 17.1% in mid-2021. It will also fuel wealth formation and is expected to be spent over several years.

Furthermore, incomes will be supported by the tax reform of 2022-2024, which includes tariff reduction of the second stage, an increase in the family bonus and child surplus, a decrease in the health insurance contribution rate for low-income earners, and the climate bonus. The tax reform is estimated to reduce the tax bill of private households by 1.2% of disposable household income in 2022, according to the Austrian Institute of Economic Research (WIFO). An improving labor market will also support revenue and consumption after the deterioration experienced in 2020. According to the national methodology definition, the unemployment rate should decline from 9.9% in 2020 to 7.1% in 2022. Concomitantly, wages should grow by 5% in 2022, driven by a tighter labor market, as labor shortages have been reported again after a temporary relief during the first waves of the pandemic. Nevertheless, supply shortages and a steep rise in prices of commodities and various inputs will be the main obstacle affecting Austrian companies in 2022.

Along with the reversal of the value-added tax cut, this will keep inflation above 3% in 2022 before gradually declining in the subsequent years. Fixed asset investments will be underpinned by the expansion of the manufacturing sector, allocations from the NextGenerationEU (NGEU) fund, and the investment premium. The latter subsidy will trigger additional machinery and equipment investment that otherwise would not have been made. At the same time, a reduction in the corporate tax rate and the introduction of an eco‑investment tax allowance should limit a drop in investments in the following years.

Declining budget deficit and increasing current account surplus

In 2022, the current account surplus should increase on the back of the trade surplus, thanks to favorable global trade and the improvement in the tourism sector, which accounts for about 15% of GDP. Remittances of foreign workers sending money back to their country of origin will continue to fuel a high secondary income deficit. The primary income account is expected to remain close to balance with an equivalent decline in the proceeds of Austrian investments abroad and foreign investments in the country.

The gradual unwinding of fiscal support, in line with the economic recovery, will improve the public deficit and debt. However, the budget balance will remain in deficit, contrasting with the surpluses recorded before the pandemic. A mix of various expenditures will continue to fuel the budget deficit, with the ecological and social tax reform, pension increase, and additional investment measures under the Recovery and Resilience Facility (RRF).

Destabilized coalition

Following snap elections held in September 2019, the center-right Austrian People's Party (ÖVP) remained the largest party (37.5% of the vote resulting in 71 out of 183 seats). Nonetheless, in October 2021, the ruling coalition, comprising ÖVP and the Greens, was destabilized by the resignation of Sebastian Kurz, the chancellor. This came promptly after the revelation that state prosecutors were investigating corruption allegations related to his aides in 2016, who allegedly used taxpayer money to pay for press advertisements in exchange for favorable coverage, including the publication of manipulated polling data. Mr. Kurz denied the allegations and refused to stand down, but the Greens only wanted to continue the coalition under a different chancellor. Hence, Alexander Schallenberg, formerly the ÖVP foreign minister, took over as chancellor and head of the ÖVP-Greens coalition. At the same time, Mr. Kurz remained the ÖVP chairman and parliamentary leader of the party.

Since November 2021, the Austrian government decided to tighten restrictions for the unvaccinated at the beginning but then also for the vaccinated and re-introduce a lockdown. The social discontent caused by such measures triggered protests and added challenges to the new chancellor.