Austria Faces Most Severe Recession in Eurozone

The economic outlook for Austria remains bleak as the nation grapples with the most severe recession among all Eurozone countries. Contributing factors include a significant decline in industrial production across the Euro area and increasing trade tensions, particularly with the United States.

Recent forecasts from leading economic institutes, WIFO and IHS, predict a contraction in Austria's economy for 2025, estimating a decrease of 0.3% and 0.2% respectively. Recovery is not anticipated until the following year, with projected growth rates of 1.2% from WIFO and 1.1% from IHS for 2026. However, concerns linger that a further downturn could occur, marking a possible fourth consecutive year of recession. Experts acknowledge that while models suggest a fourth year of recession is unlikely, it cannot be entirely dismissed.

To stimulate economic recovery, experts emphasize the necessity for substantial reforms within the domestic market. WIFO's director has indicated that without proactive measures, the potential for a continued downturn in 2026 remains a possibility. In December, economists had initially forecasted growth rates of 0.6% and 0.7% for this year, highlighting the worsening economic conditions.

The Austrian National Bank has also revised its growth predictions, now expecting a slight decline of 0.1% in the Gross Domestic Product (GDP), down from earlier projections of nearly 1% growth.

The stagnation of economic growth carries significant political implications, as the need for austerity measures intensifies. A decline in tax revenues due to the economic crisis is severely impacting state finances, especially against the backdrop of existing budget deficits that require correction.

Current consolidation efforts amount to EUR6.4 billion, as reported to the EU Commission, but analysts warn that this may fall short. The anticipated budget deficit for 2025 is projected at 3.3%, down from 4.1% in the previous year, but expected to rise to 3.5% in 2026. The likelihood of Austria entering a deficit procedure is now considered a distinct possibility.

In response to the economic challenges, certain austerity measures are already being implemented. The elimination of the climate bonus is expected to contribute EUR2 billion to the budget, along with planned reductions in subsidies, which may save around EUR900 million. Additional savings in government ministries are projected to yield EUR1.1 billion by 2026. Cuts to educational leave programs are also anticipated to generate EUR350 million this year and EUR650 million next year.

Conversely, costs related to pensions, healthcare, and national debt interest are on the rise. The public sector wage agreements are set to increase salaries by 0.3 percentage points above inflation in 2026, further straining the budget. Increased unemployment rates are expected to exacerbate these financial pressures, with unemployment projected to rise from 7% last year to 7.5% this year, before potentially dropping to 7.3% post-recession in 2026.

A complex economic scenario is unfolding in Austria, where the required savings measures may not suffice to counteract the economic downturn. Simultaneously, these measures could hinder growth by an estimated 0.3 percentage points.

Looking ahead to 2026, the hope is for an economic rebound. After an unexpected contraction of 1.2% in 2024, Austria now leads the Eurozone with the steepest recession, with Latvia trailing at a distance with a decline of 0.4%. As growth remains elusive for a third consecutive year, optimism is pinned on 2026, when a modest increase in private consumption, lower interest rates, and a recovery within the Eurozone could set the stage for a cautious return to growth.

However, potential risks persist, including ongoing political uncertainties, tariffs imposed by the United States, and a potential slowdown in global economic activity. The director of WIFO has noted that the domestic economy is expected to emerge from the longest recession since the establishment of the Second Republic by mid-2025, with the pace of recovery largely dependent on fluctuating international conditions.