The War in Ukraine Clouds Medium-term Economic Outlook

The Austrian economy recovered quickly from the COVID-19 crisis in 2021. The growth outlook for 2022 (+3.9 percent) is 1 percentage point weaker than expected last fall due to the war in Ukraine and the omicron wave of the COVID-19 pandemic. In line with the assumed global economic scenario, GDP growth is expected to slow to the medium-term trend growth rate of around 1½ percent by 2026 (Ø 2022-2026 +2.1 percent p.a., Ø 2010-2019 +1.5 percent p.a.). Despite this marked economic slowdown, the increasing labour shortage triggered by demographic change causes a significant reduction in unemployment: the unemployment rate reaches pre-crisis levels already in 2022 and is expected to be 6 percent in 2026. The omicron wave in China and especially the Ukraine war will reinforce and prolong the strong upward pressure on prices that has prevailed globally since 2021. The upward pressure is being driven primarily by sharp rises in energy, raw material, and intermediate product prices as well as a marked increase in transport costs due to supply bottlenecks and delivery lags. In Austria, consumer prices will rise by almost 6 percent in 2022 and by 3¼ percent in 2023. Even in the medium term the inflation rate is likely to remain at least ¼ percentage point above the 2 percent inflation target of the ECB. Despite additional government spending to counter the loss of purchasing power due to high inflation and care provision for refugees from Ukraine, the projected deficit ratio for 2022 is unchanged from the October 2021 medium-term assessment (including the tax reform) at 2.4 percent of nominal GDP. This is mainly due to an inflation-driven increase in revenues. By 2026, the budget deficit is expected to decline to 0.4 percent of GDP.