The Ukraine war hit Austria's economy hard.

The growth of domestic industry is stagnating despite full order books and slipping into a recession from the second quarter, and the high inflation of almost 6 percent is also dampening the consumer appetite, said Gabriel Felbermayr, director of the Austrian Institute for Economic Research (Wifo).

Everything could get even worse: "An import stop for gas and oil would trigger an overall economic recession" and cause the gross domestic product to collapse by 2 to 4 percent.

Andreas Mihm

Business correspondent for Austria, Central and Eastern Europe and Turkey based in Vienna.

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After a good start to the year and based on the current situation, the Wifo still calculates growth of 3.9 percent this year, the Vienna Institute for Advanced Studies (IHS) with 3.6 percent.

That is significantly more than is still expected in Germany.

Despite all the uncertainty caused by the war, there is great hope behind it – in the Germans.

"Tourism, with its high catch-up potential, is becoming a pillar of growth," said Felbermayr.

All in all, "more than half of the economic growth forecast for 2022 will be in the area of ​​accommodation and gastronomy." This is where the Germans come into play.

Because they are the largest group of tourists in Austria.

According to Statistics Austria, two thirds of the 50 million overnight stays by foreign tourists were made by guests from Germany in the past year, which was severely affected by the corona pandemic.

With 32 million overnight stays, they even surpassed the number of local guests.

High dynamism in tourism expected

The IHS also expects a disproportionate contribution to growth from foreign trade, "which is primarily due to the recovery of domestic tourism".

Despite strong momentum, the tourism business will not reach the pre-crisis level even in 2023.

The war in Ukraine is contributing to this.

“Travellers from America and Asia in particular will avoid European destinations,” Wifo speculates.

Both institutes anticipate the long-term, problematic consequences of the war in Ukraine.

For 2023, the IHS only expects growth in gross domestic product of 2.3 percent, the Wifo only 2 percent.

Gross real wages would shrink by 2.3 percent this year.

Felbermayr said that only because of the recently approved tax breaks was there a net minus of 1.1 percent.

energy transition even more urgent

The war overshadowed the forecast for the current year, for which "extremely high uncertainties and considerable downside risks" exist.

The IHS warns that economic policy measures to curb the high inflation should be "targeted and under no circumstances counteract the steering effects of the price increase of fossil fuels".

Felbermayr emphasized that investments in the energy transition are now "much more urgent than a few weeks ago".

Despite the very good order situation in industry, value creation will stagnate in 2022, "because energy and preliminary products are very expensive and some of them cannot be delivered," writes Wifo.

The growth is entirely attributable to services.

Private consumption will develop weaker than expected due to the sharp increase in consumer prices - 5.8 percent estimates the Wifo, 5.5 percent the IHS - but better than last year.

Labor market in good shape, more short-time work

The domestic labor market, which Wifo sees “in a boom phase”, is developing positively.

Employment is higher than before the outbreak of the corona pandemic, unemployment is lower.

Calculated over the year (in the national definition) it will be 6.75 percent, the IHS expects 6.5 percent.

The institutes see gross fixed capital formation this year at 3.1 to 3.5 percent above the previous year's value.

Not least because of problems with the recruitment of workers, industrial companies are likely to try increasingly to keep staff in the company through short-time work.

The high demand for workers, together with the very high inflation, will lead to a strong increase in per capita wages of almost 5 percent in the coming year.

The IHS is forecasting a significant increase in government bonds, which were still negative last year.

This year, the experts see an increase of one percentage point to 0.7 percent, next year to 1.2 percent.

The budget deficit will shrink from 5.8 percent last year to 2.3 (Wifo: 2.4) percent this year and will further decrease to 1.7 (Wifo: 1.1) percent in 2023.