Economy still weak, inflation still high
After a boom in 2022, the Austrian economy fell into recession starting in 2Q23. Industry and trade were particularly weak. Tourism supported the economy with a record number of overnight stays in the summer season. The labor market remains tight, although the number of job vacancies declined somewhat and the unemployment rate rose slightly. Inflation has eased recently, but remains well above the euro area average due to high energy prices and inflationary pressures in the services sector.
High ratings reaffirmed
All four major rating agencies confirmed Austria’s high ratings. Fitch revised Austria’s outlook from negative to stable in August 2023 due to the reduced risk of energy shortages in the medium term. On the other hand, the rating agencies are concerned about the recent slowdown in economic growth and the higher and more persistent inflation compared to other euro area economies.
No significant debt reduction expected for now
The budget deficit was reduced from -5.8% of GDP in 2021 to -3.5% of GDP in 2022. The public debt-to-GDP ratio falls significantly from 82.5% in 2021 to 78.4% in 2022, mainly due to strong nominal GDP growth. The Ministry of Finance’s fiscal deficit and debt targets for 2024-2027 reflect the government’s overall commitment to the consolidation path, although the debt ratio is expected to remain rather stable. However, the Maastricht deficit is expected to remain below the 3.0% of GDP threshold.
Risk premium likely to remain high for now
We expect the underlying price pressure in the services sector to ease in the coming months and that the first interest rate cut on the way to monetary policy normalization can be implemented in mid-2024. The risk premium of 10-year Austrian government bonds over 10-year German bunds has widened significantly in 2022. Given the challenging economic environment, we do not expect a significant narrowing of the risk premium for the time being.
