Economic activity is projected to recover slowly from a two-year contraction, with GDP growing by 1.1% in 2025 and 1.4% in 2026. Inflation is set to decline to target in the course of 2025. Rising nominal wages, reflecting the delayed passthrough of past inflation, will support household incomes and are expected to support consumption growth along with some decline in savings. Business investment is projected to be hindered by weak demand and high labour costs. Labour market conditions are expected to slowly deteriorate, in particular in industry, resulting in a small increase in the unemployment rate.

The fiscal stance will be mildly contractionary over the projection period. The economic contraction in 2024 and new discretionary measures should keep the budget deficit above 3% of GDP in 2025. A medium-term plan to reduce the deficit as growth picks up would be welcome. Raising the labour force participation of women and older cohorts, and shifting taxation from labour to other bases, would support inclusive growth.

The economy recovered slowly in the first three quarters of 2024 due to subdued investment, slow household consumption and weak external demand. Despite improved consumer confidence and real wages, consumption fell in the second quarter as households built up savings. Exports have been declining since the second quarter of 2023, in particular in intermediate and capital goods. Tight financial conditions and weak demand are slowing investment, which is now constrained by rising labour costs. Inflation fell to 1.8% in October due to lower energy and fuel prices. The unemployment rate remains low, but the labour market, particularly in industry, has started to weaken. Business surveys suggest that labour shortages are now below their pre-pandemic levels in the manufacturing and services sectors.

Germany's weak economy, the destination of over 30% of Austria's exports, has weighed significantly on export growth. The transmission of falling global energy prices to consumer prices has been slower in Austria than in other euro area countries in particular due to long contractual lock-in periods. Recent area-wide monetary loosening will take time to impact investment. Meanwhile, high interest rates will continue to incentivise household savings in the short term.

The public deficit is forecast to remain above 3% in 2024 and 2025, despite a slight tightening of the fiscal stance. The phase-out of crises-related support is offset by new discretionary spending. In particular, the new fiscal equalisation scheme with subnational governments supports additional expenditures by local authorities including for childcare, housing renovation, and climate protection; and the housing package supports construction investments via subsidies for housing developers and home improvements. Expenditures will also rise as past inflation passes through to public wages and social benefits. Continued implementation of the eco-social tax reform is increasing revenue from carbon taxation but also reducing income taxation and increasing transfers to households via the climate bonus. Given relatively high deficit and debt levels above the thresholds of the EU rules, a consolidation of 0.5 percentage points of potential GDP is assumed in 2026.

Output growth will gradually recover to 1.1% in 2025 and 1.4% in 2026, as both domestic and external demand improve. Private consumption will pick up as real wages increase due to past inflation adjustments, and as high savings start to be drawn down as interest rates fall. Private investment will remain restrained by tight financial conditions and higher labour costs. The labour market will slightly deteriorate, with unemployment rising from 5.1% in 2023 to 5.3% in 2025. GDP growth will exceed potential in 2025 and 2026, driven by an upturn of domestic demand and the recovery in European demand, but the quarterly pace will slow during 2026 due to assumed fiscal consolidation. Risks to the projections are balanced. Low levels of hours worked suggest that labour hoarding is potentially high, while profits are squeezed by rising employee compensation. However, domestic demand can grow even faster as firms could rely on significant past savings, and rising real wages and high savings of households have not passed through yet to consumption. Finally, Austria remains susceptible to an interruption of Russian gas which represents 90% of gas imports, although shortages are unlikely given the high level of reserves and recent diversification measures.

The economy needs to improve its capacity to adapt to future shocks and address structural challenges. Easing entry requirements into certain professional services could help revive business dynamism. Activating underrepresented groups in the labour market would strengthen resilience. Labour market tightness remains higher than before the pandemic and will be amplified by long-term trends like population ageing and the green and digital transitions. Expanding high-quality preschool education and further strengthening incentives for more balanced use of parental leave between mothers and fathers would address low full-time employment rates of women. Targeted reductions in the tax wedge, the fourth highest in the OECD, could help increase the employment of low-income workers and reduce the prevalence of part-time work. More generally, labour force participation and sustainable growth would be promoted by shifting taxation from labour to other bases, including carbon and property taxation.