Expert explains

Why our economy is not gaining momentum

Industry is suffering particularly from the weak economy.

(Bild: stock.adobe.com)

Austria's economy will continue to grow only weakly over the next few years. Following a recession in 2023 and again this year, the Austrian Institute of Economic Research (Wifo) is forecasting annual growth of just 1.25 percent until 2029. The two reasons are quickly identified by experts ...

"Austria is running out of growth," is how Wifo Director Gabriel Felbermayr sums it up. There are many reasons for this. But two points in particular are a burden on our business location ...

Compared to other countries, energy prices and unit labor costs are significantly higher in this country. "Whereas we used to be at the lower end of the EU in terms of energy prices, we are now at the upper end," explains Wifo expert Josef Baumgartner. This is hitting small and medium-sized companies particularly hard.

As far as unit labor costs are concerned, they have deteriorated significantly compared to Germany. This is also because wages and salaries have increased much more than in other countries through collective agreements. This weakens our competitive position and depresses growth.

All in all, the researchers assume that our GDP growth will be 0.2 percentage points weaker than that of the eurozone by 2029.

German slump weighs on exports
Neighboring Germany is the most important foreign market for Austria's companies. As things are anything but rosy there at the moment, our export companies are also feeling the effects. The fact that the traffic light coalition has now been dissolved and the standstill in German politics is now continuing is no help here. "The export boom has become less realistic since Wednesday and is associated with risks," says Felbermayr in the direction of our neighbor. Austria must now "pull its own weight" and ensure economic growth and sustainable public finances. 

Austria must now put in more effort itself and ensure economic growth.

Wifo-Direktor Gabriel Felbermayr

Bild: Harald Dostal, Krone KREATIV

Should "do something to counter" the Trump administration
In addition, the new Trump administration is leading to more uncertainty. No one really knows what will happen. But Trump's threats alone, for example with regard to tariffs, would lead to more being produced in the USA for the USA again. This in turn slows down our exports to the United States. The country is Austria's second most important trading partner worldwide after Germany. Austria must therefore urgently enter into dialog with the Trump administration, according to the economic researcher.

Inflation will rise again slightly in 2025
After the latest inflation rate of 1.8 percent in October, a slight increase is expected next year. By mid-2025, however, the rate should slow down again to around two percent. Experts see the reasons for the higher inflation rate in the expiry of the electricity price brake, the higher energy tax and the increase in CO2 pricing.

Consumption likely to support weak upturn from 2025
The weak growth is likely to be driven by private consumption. The high savings rate of an estimated 11.5% next year is likely to fall to 9.25% by 2029, according to Wifo estimates. This weakened momentum will strengthen consumption. High wage settlements have largely maintained the purchasing power of households, despite high inflation in recent years. 

What is urgently needed now
In view of the difficult situation, there is a great need for action in Austria. First and foremost, a reform agenda with a focus on growth and the start of budget consolidation is needed. "However, we must not step on the brakes with both feet," explains Felbermayr. What is needed is a stable budget path until 2029, because if the state does not get its finances under control, there is a risk of a poorer credit rating, which will not only make government debt more expensive, but also private borrowing costs. 

Particular attention should be paid to government spending, which currently stands at around 55% of GDP. "The aim must be to get below 50 percent," says Felbermayr. In any case, it would not be down to revenue.

Specifically, the head of Wifo would like to see the abolition of the climate bonus, for example, which burdens the state coffers with around two billion euros. A replacement would be possible in the form of a new, reformed commuter allowance. 

Subsidy jungle needs to be cleared up
However, exploding social spending also needs to be brought under control. A lot of money could be saved here by suspending or reducing inflation indexation, for example in pensions, civil servants or social benefits. In addition, the "subsidy jungle" should be cleared up, they say. This would also save a billion euros.

However, the abolition of the diesel privilege and an increase in fuel tax, which was last adjusted in 2011, should also be discussed. Felbermayr could also imagine an increase in alcohol tax (for example on beer) and the introduction of a tax on sugary drinks.

For the economic researchers, however, tax increases that are detrimental to growth are taboo. Labor and income are already taxed too heavily.