After months of recession warnings and gloomy outlooks, Austria’s economy is finally showing signs of recovery. New forecasts from the country’s leading economic institutes, the Austrian Institute of Economic Research (WIFO) and the Institute for Advanced Studies (IHS), suggest growth is picking up again in 2026.
But there is a catch: while the overall economy improves, many households are likely to see their incomes decline in the short term.
Growth is back, but it remains modest
WIFO expects Austria’s gross domestic product to grow by 0.5 percent this year and by 1.2 percent in 2026. IHS is a touch more cautious, forecasting growth of around 1 percent next year. Both institutes expect a similar pace to continue into 2027, though they note that longer-term forecasts remain uncertain.
The labour market is expected to remain relatively stable. Unemployment should edge down slightly, while overall employment continues to rise. That improvement reflects demographic change, the institutes said.
From 2025, Austria’s working-age population, defined as those aged between 15 and 64, is set to shrink for the first time. Fewer people entering the labour market reduces pressure on employment figures, even if economic growth remains moderate. Changes such as higher female employment and longer working lives are offsetting some of the decline, but the labour supply is no longer growing as it used to.
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Investment and industry show signs of life
One reason for the improved outlook is stronger than expected investment activity, the institutes said. Only a few months ago, both WIFO and IHS assumed that corporate investment would fall. New data from Statistics Austria now suggests that investment actually increased slightly this year.
There are also small signs of stabilisation in industrial production, as reported by der Standard. After a prolonged downturn, sentiment among manufacturers has improved, but conditions remain challenging. Construction continues to stagnate, and consumer spending is only gradually recovering.
This combination is enough to justify cautious optimism, but not enough to declare a full recovery, the report added. Austria’s exports are expected to decline for a third consecutive year in 2025. Economists point to uncertainty around US trade policy and, increasingly, competitive pressure from China.
China’s impact reaches Austrian exporters
The effect of Chinese competition is often indirect. Many Austrian firms supply components to European manufacturers, particularly in Germany. When German companies lose market share to Chinese rivals, Austrian suppliers feel the consequences further down the value chain.
This helps explain why exports remain weak, even though Austrian producers have not raised prices aggressively. In fact, prices for goods produced in Austria have been falling slightly for almost two years. Higher production costs alone do not explain the decline in sales.
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Wage restraint helps competitiveness, but hits incomes
That context has fuelled the debate over wage restraint. Earlier this year, WIFO director Gabriel Felbermayr and IHS head Holger Bonin called for moderate wage settlements to restore competitiveness. In practice, that is what happened in several sectors.
In metalworking, pay deals were agreed below inflation. Retail and other industries followed a similar pattern. In the public sector, wage increases for 2026 were effectively delayed, with full adjustments only taking effect from July.
According to Felbermayr, investment has begun to recover but remains below pre-pandemic levels. Much of the recent increase is driven by energy companies, while industrial profitability remains weak.
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Households feel worse off despite recovery
For households, the downside of wage restraint is already visible. After real disposable incomes rose by 4.4 percent last year, they are expected to fall by 0.9 percent this year. In 2024, incomes had already declined by 0.7 percent.
In other words, even as economic growth returns, many people will feel poorer. That helps explain why consumer confidence remains low, despite more positive macroeconomic indicators.
There is better news on inflation. Inflation is expected to average 3.6 percent this year but fall to around 2.5 percent in 2026, according to IHS. Much of this decline is due to so-called base effects.
In 2025, inflation was pushed up by the end of the electricity price cap, which led to higher energy bills. Once that comparison drops out at the start of the new year, headline inflation should ease automatically.
Key vocabulary
das Bruttoinlandsprodukt (BIP) – gross domestic product, the total value of goods and services produced in an economy
die Lohnstückkosten – unit labour costs, measuring labour costs per unit of output
die Lohnzurückhaltung – wage restraint, when pay rises are kept deliberately low
das verfügbare Haushaltseinkommen – disposable household income after taxes and transfers
die Basiseffekte – statistical effects caused by year-on-year price comparisons
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