OECD Economic Outlook, Volume 2025 Issue 1

Austria

The economy is projected to begin recovering from a prolonged recession, with output declining by 0.3% in 2025, but growing modestly by 1% in 2026. A gradual pickup in household consumption and private investment, supported by lower interest rates and a resilient labour market, will help drive the recovery. Inflation is expected to decline towards 2% by end-2026. Progressive fiscal consolidation may constrain demand growth. A slowdown in activity in Europe or deepening of structural challenges may hold back the recovery, while more persistent wage increases could further impair competitiveness and sustain higher inflation.

Fiscal plans should progressively reduce the budget deficit in the years ahead, bringing it below 3% of GDP. Leveraging EU funds would help cushion the impact of a restrictive fiscal policy stance while strengthening economic resilience through the structural adjustment of industries heavily affected by rising energy costs. Increasing labour force participation among women and older workers as planned, along with shifting taxation away from labour, would promote more inclusive growth and support the sustainability of the public finances. Plans to expand broadband should include easing regulations relating to infrastructure deployment alongside innovative policy instruments and incentives.

The economy has continued to contract, albeit at a slower pace

Economic activity rose by 0.2% in the first quarter of 2025, signalling a modest recovery after having declined for three consecutive quarters and, in particular, by 0.4% in 2024Q4. Output growth was primarily driven by industrial production (up 0.6%, q-o-q in real terms), services (up 0.8%) and exports (up 1.4%). Inflation rose to 3.3% in April from 3.1% in March.

Austria

Source: Statistics Austria; and OECD Economic Outlook 117 database.

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Austria: Demand, output and prices

Statlink

Austria is a highly open economy, and around two-thirds of trade occurs within the European Union where it is closely integrated into regional value chains. Weak trade performance in recent years reflects sectoral challenges in key products, such as machinery and vehicles, processed goods, chemical products, and other manufactured goods. While direct exposure to increases in US tariffs on EU goods is modest, there are indirect effects through weaker demand in European markets as a whole, notably Germany. Gas and electricity connections to other European countries are being upgraded rapidly, which will improve energy security and may help to lower prices, including for energy-intensive sectors.

Fiscal consolidation is planned

In 2024, the budget deficit reached an unexpectedly high level of 4.7% of GDP, driven by higher‑than-expected wage increases and spending at sub-federal level, and breached the 3% of GDP threshold of the EU rules. The new government has introduced a seven-year budget consolidation plan. In the short run, spending cuts are scheduled to amount to approximately EUR 6.3 billion in 2025 (1.3% of GDP) and EUR 8.7 billion in 2026 (1.9% of GDP). The spending reductions are primarily targeted at reducing pensions, family support and environmental subsidies and implementing across-the-board cuts in all ministerial departments. The plans also incorporate targeted tax increases on banks, tobacco products, gambling, real estate transactions and foundations, but tax relief for SMEs, as well as incentives for additional performance and investments in social welfare and economic growth.

The economy is set to begin recovering

Economic activity is projected to contract by 0.3% in 2025, before growing by a modest 1.0% in 2026. Household consumption is expected to rebound gradually as real wages continue rising following previous inflation adjustments. With falling interest rates, private investment should begin to recover in the second half of 2025, although at a subdued pace given uncertainty and structural challenges. Trade growth will be relatively modest given wider regional developments, but will be supported in 2026 by higher government spending in Germany. Inflation is expected to decline steadily over the remainder of 2025 and 2026. Risks to these projections are skewed to the downside. Heightened trade tensions affecting Germany and an extended crisis in the automotive and other industrial sectors could further undermine economic prospects. More persistent wage increases could further hamper competitiveness. The fiscal consolidation plan may exert a stronger-than-expected dampening effect on economic activity, potentially resulting in a prolonged period of sluggish growth.

Fiscal consolidation is needed and structural reforms would help sustain the recovery

The medium-term consolidation strategy aims to reduce the fiscal deficit gradually until 2031 but phasing it in more progressively in the initial two years would limit the near-term impact on economic growth. Sustaining the consolidation path will be challenging given that population aging is projected to add fiscal pressure of around 2% of GDP by 2030, on top of rising interest payments and climate and defence spending. Reforms aimed at reducing regulatory barriers such as cutting red tape and lowering entry barriers in targeted sectors, in particular, professional services, would boost competitiveness and business investment. Similarly, addressing regulatory bottlenecks in housing, by easing land-use regulations, could improve housing supply and stimulate construction investment. Accelerating public investment plans to expand communications networks and high-speed connectivity, and easing related regulatory constraints, would foster digitalization and support long‑term economic growth. Policies to increase female labour market participation – such as the planned expansion in child and long-term care facilities – and measures to raise the effective retirement age would help mitigate the impact of a declining working-age population.