Why is Austria facing its longest recession in decades?

For the third year, Austria’s economy has been shrinking. But why is the country struggling so much compared to its European neighbours?

How bad is it really?

Let's talk numbers. Recent forecasts from Austria’s two leading economic research institutes, WIFO and IHS, paint a grim picture. As reported by Der Standard, the institutes now predict the Austrian economy will shrink by around 0.3 percent in 2025. That might not sound huge, but it's a serious setback - especially since Austria has already experienced two years of recession, with GDP declining by 1 percent in 2023 and 1.2 percent in 2024.

Austria recorded the worst economic performance in the entire EU last year - far worse than Latvia or even Germany, according to Die Presse. So yes, things are bad, and they’ve been bad for quite some time.

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Why is Austria faring worse than its neighbours?

The reasons are complex, but let's simplify:

Firstly, Austria relies heavily on industry, especially mechanical engineering, metal production, and electronics. Unfortunately, these sectors have been hit hard by declining international demand. Unlike countries that benefit from booming industries, such as pharmaceuticals, Austria finds itself vulnerable when global markets cool down.

Besides, labour costs have surged significantly in Austria - more than anywhere else in Europe, according to WIFO director Gabriel Felbermayr, as reported by Der Standard.

Rising labour costs make Austrian products less competitive abroad, particularly as Chinese companies increasingly move into areas traditionally dominated by European manufacturers, such as the automotive sector, the Der Standard report said.

And finally, Austria’s construction sector has struggled unusually badly. Despite fewer new building projects, construction costs have skyrocketed by 31 percent since 2021, according to Statistics Austria. Oddly, prices remain stubbornly high despite lower demand. This has caused investment in new housing and infrastructure to stall, further hurting economic growth.

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People are spending less and saving more

It's not just industry and construction; consumers in Austria are spending less, too. With high inflation squeezing their budgets, Austrians have become cautious. Economists call this phenomenon "fear-saving," meaning people are putting away more money than usual due to anxiety about job security and rising prices.

Retail and hospitality have been hit especially hard, with the slowdown affecting other parts of the economy. This hesitation contrasts with places like Germany, where consumption remains slightly stronger.

The budget situation isn't helping

The ongoing recession has worsened Austria’s budget deficit. The government initially planned €6.4 billion in austerity measures to keep the deficit below the EU limit of 3 percent, but economists now agree this won’t be enough. Instead, the deficit is expected to reach around 3.3 percent this year, according to WIFO.

Ironically, attempts to reduce spending have made things worse. The government’s austerity measures have further slowed economic growth by around 0.3 percent, creating a difficult scenario where Austria needs to save money without further stifling the economy, as the IHS explained.

Some spending cuts have already begun: the controversial abolition of the climate bonus, cuts in funding programmes, and ending educational leave. But these savings are offset by increasing costs for pensions, healthcare, and rising interest payments on public debt.

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Will things get better soon?

Economists at WIFO and IHS see some signs to stay optimistic. They expect the economy to stabilise and return to modest growth by the second half of 2025 or early 2026. Lower interest rates from the European Central Bank, a recovery in construction investment, and a massive €500 billion infrastructure programme planned in Germany - Austria’s most important trading partner - could help kick-start recovery.

But uncertainties remain high. Political tensions, such as Donald Trump's potential new tariffs on European goods, international market instability, and ongoing geopolitical uncertainty, all threaten the fragile recovery, as highlighted by Die Presse.

What does all this mean for people in Austria?

Expect things to remain tight for a bit longer. Unemployment has risen slightly, wages aren’t keeping up with inflation, and confidence among businesses and consumers remains low.

However, economists remain cautiously optimistic about a recovery in 2026. While Austria is currently enduring its longest recession in decades, conditions might gradually improve if the international situation stabilises and consumer confidence returns.

Editor’s note: This article was updated to clarify that the reference to Chinese competition came from Der Standard’s analysis.