Private consumption is driving the economic recovery

Overall, economic dynamics have improved significantly in recent quarters, Gerhard Fenz, head of the OeNB’s economics department, said on Friday. The industrial and construction sector is mainly responsible for the sluggish recovery this year. “These are areas where weak growth has proven to be relatively stable,” Fenz said. On the other hand, things are going marginally better in the services sector where the situation and mood are significantly better.

However, this year there will be only a small increase. “Historically very unusual, the most important impetus for the rise will come from private consumption,” the economist continued. The OeNB expects private consumption to grow by 1.5 percent this year (2023: minus 0.2 percent). This is driven by a sharp increase in real wages. The 3 percent real increase expected this year in private household income is “the highest increase we’ve seen in the last 20 years,” Fenz said. However, epidemic years are excluded from this calculation.

Decline in inflation and delayed inflationary compensation for various income components are primarily responsible for the increase in income. In addition, social benefits – including pensions – increased significantly.

In addition to private consumption, exports will support economic growth in 2024, although the recovery here is modest. Conversely, gross fixed capital formation is expected to continue to decline. Investments, particularly in equipment and housing, are being weighed down by high financing costs and poor profit expectations, the National Bank said on Friday.

For the next two years, the OeNB expects economic growth to increase to 1.8 percent (2025) and plus 1.5 percent (2026). Fence sees an “economic peak” in this cycle in 2025. “Establishment will become more widespread and consumption growth will accelerate again,” Fenz said. But exports and investment will again grow very strongly, the latter due to more favorable financial conditions. The construction industry is also supported by the construction package decided by the government. However, due to sharp increases in unit labor costs and Austria’s somewhat weaker price competitiveness, export growth will lag slightly behind demand.

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Growth is expected to return somewhat in 2026 – but at 1.5 percent, the forecast is still higher than the possibility. “Overall, we expect — albeit somewhat delayed — a very strong economic recovery,” Fenz said.

The National Bank expects inflation to pick up this year and move significantly closer to the European Central Bank’s (ECB) target of 2 percent in the coming years. Harmonized inflation (HICP), measured by European standards, is expected to halve to 3.4 percent this year, after 7.7 percent in 2023, according to the OeNB forecast. Low energy prices, in particular, may contribute to this decline but also… flat price developments for industrial goods (excluding energy) and food, said Birgit Nissner, director of the OeNB’s economic department.

The lack of a steep decline is due to higher wage growth. This means that the gap to average inflation in the euro area is gradually narrowing. Services also contributed less to the decline in inflation. Prices, but also rents, in particular in the catering sector, continue to make a strong contribution to inflation in Austria, according to Niesner.

Over the next two years, inflation should continue to decline and support economic recovery. The OeNB predicts that the inflation rate will decrease to 2.7 percent (2025) and 2.5 percent (2026). Over the entire forecast period, core inflation – the rate that excludes prices for volatile items such as energy and food – but HICP is higher than the rate of inflation, the National Bank writes.

Overall, the labor market will grow strongly during the period from 2024 to 2026. Wage growth peaked in early 2024 and is now expected to slow again in line with inflation. The unemployment rate is expected to increase this year from 6.4 percent (2023) to 6.7 percent, but this will be followed by a decline to 6.5 percent (2025) and 6.3 percent (2026).

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