War in Ukraine Continues to Dominate Austria's Economic Outlook

BusinessEconomy ♦ Published: May 12, 2022; 18:14 ♦ (Vindobona)

In a recently published report, the Austrian Institute of Economic Research (WIFO) gives an insight into Austria's economic situation and forecasts the development of the economy over the next few years. The Omikron wave and the war in Ukraine will continue to slow down Austria's economic growth in the next few years and no relief is expected for the time being. Nevertheless, there is also good news concerning the labour market.

Austria's economy will continue to be affected by the war in Ukraine in the coming years. / Picture: © Wikipedia / Rftblr

The invasion of Russian troops in Ukraine not only shook up international relations. Economies around the globe were also massively affected and the effects of the war are felt everywhere - including in Austria. After Austria's economy recovered noticeably in 2021, the Omikron wave and the conflict now brought less euphoric forecasts again.

The Austrian Institute of Economic Research (WIFO) expects the war to put the brakes on the economy in the coming years. However, there is not only bad news, but also rays of hope.

In its publication, WIFO speaks of a significant deterioration of the global economy and Austria's national economy, which had to be corrected downwards since the last medium-term forecast in October 2021.

In addition to omicron and armed conflicts, the rising inflationary pressure, driven by energy, raw material and food prices as well as bottlenecks in the global supply chains, is a burden for the development of the Austrian economy. In the period from 2022 to 2026, an average GDP growth of only 2.1% per year (real) is expected.

However, the forecast is heavily dependent on future international developments, the occurrence of which cannot be reliably assessed at the present time. WIFO assumes that oil and natural gas in particular will continue to flow from Russia to the EU and that the EU sanctions against Russia will still not include an import ban on these two energy raw materials.

Despite all economic hurdles, WIFO expects economic growth of 3.9% in Austria and thus assumes a strong expansion. Despite the subsequent marked slowdown in GDP growth, the increasing labour shortage triggered by demographic change causes a noticeable decline in unemployment in the forecast period: the unemployment rate already reaches the pre-crisis level in 2022 and is expected to be 6% in 2026.

Inflationary pressure remains high

The high demand for goods and supply bottlenecks led to strong price increases for raw materials (wood, ores, crude oil), energy (petroleum products, natural gas, electricity) and intermediate products (e.g. microchips) on the world markets in 2021.

Together with higher transport costs (shipping container and truck traffic), this drove up prices for imported goods and domestic production costs. Due to the omicron wave of the COVID-19 pandemic and the Ukraine war, price increases gained further momentum in Q1 2022.

Assuming that Russian oil and natural gas continue to flow, inflation is forecast to average 5.8% for the year in 2022, with the peak of price inflation expected in Q2 2022, followed by a slight easing in the following months.

Since energy price increases in European wholesale trade are only passed on to private households with a delay, the household energy sector will continue to contribute to inflation in 2023. At 3¼%, the inflation rate in 2023 will also be significantly higher than the long-term average (2010/2019 +1.9% p.a.). A slight decline to 2¼% is expected for the following years until 2026.

WIFO Austrian Institute of Economic Research