Austria's economic outlook revised to stable by S&P Global

Investing.com -- S&P Global Ratings has revised its outlook for Austria from positive to stable, citing fiscal and economic challenges. The credit ratings agency affirmed Austria's 'AA+/A-1+' ratings on February 14, 2025.

Austria has experienced two consecutive years of economic recession, with a projected economic growth of 0.4% in real terms for 2025. This is amid elevated economic risks, including those related to international trade flows.

The budget deficit in Austria for 2024 was estimated to be about 4% of GDP, higher than previous expectations. Despite an ambitious budgetary consolidation program, deficits are not expected to decline below 3% of GDP before 2026.

The political outlook in Austria remains uncertain. Any new government will face the challenging task of consolidating the budget without impairing economic growth. As a result, S&P Global Ratings revised its outlook on Austria to stable from positive.

The stable outlook reflects the belief that Austria's economy will recover moderately over the next few years. However, discernible risks to its economic growth prospects and public finances will persist.

The ratings could be lowered if the country's economic growth outlook materially weakens or if budgetary and current account balances deteriorate substantially compared to current projections. Conversely, the ratings could be raised if economic growth and budgetary consolidation exceeded expectations.

Austria's economy has been in recession for over two years and its growth outlook remains fragile. Real GDP contracted by about 1% in 2024 due to sluggish private consumption and weak investment activity, primarily in the construction and manufacturing sectors. Only a moderate recovery is expected in 2025, with real GDP growth of 0.4%.

The budget deficit for 2024 exceeded previous expectations, estimated to be about 4% of GDP. Despite aims to narrow the deficit to below 3% through a consolidation program, Austria is not expected to reach this target before 2026 due to ongoing political uncertainty and a weak economic outlook. This implies that government debt net of liquid government assets will rise to 79% of GDP by 2028.

Austria's ratings are supported by the country's wealthy and diversified economy, its generally effective and stable institutional setup, and its very strong external financial profile. These strengths have remained resilient during recent economic downturns, with healthy current account surpluses on average.

Despite the current recession, Austria's economic growth outlook remains subdued amid prolonged political uncertainty. The country's current recession has persisted for longer than initially anticipated, with real GDP contracting for a second consecutive year, by about 1% in 2024. Several adverse economic developments are likely to continue into 2025.

Investment activity contracted in 2024 and only tepid signs of normalization are visible. Construction activity has contracted by 20% since the beginning of 2023 amid higher interest rates. Austria's industrial production also remains subdued, mirroring similar developments in its main trading partner, Germany.

The political outlook remains uncertain due to the prolonged absence of a government coalition since the general elections in September. This clouds the overall fiscal and economic policy stance for the next few years. Nevertheless, the authorities have a long track record of prudent policymaking.

The administration's current saving measures are likely to reduce the budget deficit to around 3% of GDP by 2026. Accordingly, general government net debt is expected to rise to 79% of GDP, from 72%, between 2024 and 2028.

Austria's current account has fully recovered after the terms-of-trade shock in 2022 and surpluses exceeding 2% of GDP are expected through 2028. The country's relatively high external debt and external financing needs are somewhat mitigated by its eurozone membership.

Inflation decreased through most of 2024 but has picked up again in recent months, mainly driven by services prices and a slight increase in food prices. This resulted in an average increase in prices of 2.9% throughout 2024. Price increases over the next few months are expected to only slightly exceed 2.0%.

The banking sector is expected to remain stable and continue profiting from the positive interest-rate environment. Austrian banks are among the largest beneficiaries of higher interest rates. This reflects their relatively high share of variable-interest-rate lending, which allows quick repricing on the asset side. As a result, banks' return on assets ratio has doubled since the ECB started increasing interest rates. This, combined with cost optimization measures, has materially improved Austrian banks' profitability and efficiency metrics, allowing them to close the gap with the peer average. In the medium term, banks' profitability and efficiency are expected to decrease in line with decreasing interest rates, but remain solid.

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