This emerges from the current medium-term forecast of the Austrian Institute for Economic Research (WIFO) for 2022 to 2026. This year, the gross domestic product (GDP) is still growing by 4.3 percent, but in the four years after that it will only be around 1.5 percent, i.e. around two-thirds weaker. As a result of the war and the COVID-19 pandemic, the prospects for economic growth will weaken significantly from the second half of the year, according to the forecast. GDP growth of only 1.6 percent is currently estimated for 2023 – that is half a percentage point less than WIFO had expected in March this year.
According to economic researchers, inflation will jump to a record high of almost 8 percent this year. But in the event that “there isn’t enough gas over the winter”, WIFO boss Gabriel Felbermayr had recently even announced an inflation rate twice as high as a possibility for 2022 at a discussion event in Berlin.
According to the forecasts by WIFO today, Tuesday, in the years to come, inflation will rise to 5.3 percent (2023) and then further to 3.5 percent (2024) or 2.7 percent (2025) and 2.5 percent percent (2026) calm down significantly.
War and pandemic increase price inflation
The war in Ukraine and the pandemic “are massively intensifying and prolonging the strong price increases that have been observed globally since 2021,” stated the economic researchers in their update of the medium-term forecast for the Austrian economy from 2022 to 2026.
This is being supported “above all by sharply rising energy, raw material and preliminary product prices as well as a significant increase in transport costs due to capacity bottlenecks and the resulting delays in delivery”. In addition, the scarcity of grain on the world market due to the Ukraine war and the increased production costs (fuel, fertilizer) caused “strong price increases for food”.
The labor market, meanwhile, should be relatively stable, with an unemployment rate of 6.3 percent in 2022 and 2023, a marginal decline to 6.2 percent in 2024 and 2025 and to 6.1 percent in 2026. From 2023, the average is According to the economic experts, growth in employment is 0.9 percent per year.
Employees in Austria are faced with a per capita real wage loss of almost 4 percent this year. In particular, due to wage indexing being delayed by about a year and inflation falling over the forecast period, real wages are “expected to increase by 1.3 percent to 0.5 percent per year” from 2023 to 2026, albeit with a downward trend. For the nominal gross wages and salaries, the development of employment, real wages per capita and inflation result in a decreasing increase from 7.8 percent (2023) to 3.8 percent in 2026.
According to the information provided, the forecast takes into account the entry into force of the eco-social tax reform 2022/2024 on January 1, 2022, the three packages of measures to cushion the loss of purchasing power due to high inflation and additional expenditure for the care of refugees from Ukraine. In addition, a “significant tightening of monetary policy” is assumed, which would mean that long-term interest rates in Austria would reach a level of 4.5 percent from the middle of the forecast period – that is 3 percentage points more than assumed in the March forecast. As a result, the interest service for the government debt will increase more.
According to WIFO, the budget deficit in 2022, at 3 percent of nominal GDP, will be a good half a percentage point higher than expected in March due to the lower revenues and higher public spending. By compensating for the cold progression from 2023, the loss of income accumulated. At the end of the forecast period, a deficit ratio of 1.4 percent (plus 1 percentage point compared to the WIFO forecast from March 2022) and a government debt ratio of a good 69 percent are expected.
Still a positive scenario
This medium-term forecast assumes a – relatively – positive scenario. For Austria and the most important trading partners such as China, no further significant restrictions on economic activity are assumed from the second half of 2022 due to the COVID-19 pandemic. The forecast is also based on the assumption that natural gas and crude oil supplies from Russia and Kazakhstan “will not be permanently restricted”.
The pandemic and the Ukraine war in particular “pose significant downside risks for the first few years of the forecast”. The emergence of new, more dangerous variants of the SARS-CoV-2 virus, especially those against which the vaccinations previously administered offer no protection, could again lead to lockdowns and supply bottlenecks in autumn 2022 and early 2023 and significantly dampen future economic development.
In addition, a further escalation of the Ukraine war could lead to an extension of EU sanctions to Russian energy resources. “In the event of a natural gas supply stop or an embargo, the European economy would slide into recession,” the economic researchers clarify. Should Russia permanently impede or completely stop crude oil deliveries from Kazakhstan to Austria, this would make crude oil supplies more expensive. At the same time, inflation would be higher than assumed in the forecast.
Russia’s share of total natural gas imports is significantly higher in Austria than e.g. B. in Germany (2021: Austria 86 percent, Germany almost 40 percent). For a landlocked country that is more dependent on pipeline supplies, it is more difficult to compensate for supply bottlenecks with other sources of supply.
It is also more difficult to compensate for natural gas with other energy sources in Austria, since the electricity generated in gas-fired power plants can hardly be replaced by our own coal-fired and, above all, nuclear power plants. In the event of a delivery stop, a more severe economic slump is to be expected in the domestic energy-intensive industry and in the generation of electricity and district heating than in Germany.
If the downside risks materialized, Austrian exports would be weaker and input costs higher than assumed in the forecast. “Economic growth, employment and income development as well as tax revenue in Austria would be weaker, and government spending would tend to be higher than assumed.”
Source: Nachrichten
