Ukraine war hits economy in installments

According to an update on Thursday, expectations for the global and Austrian economy have “deteriorated significantly” since the last medium-term forecast in October and the Russian war of aggression in Ukraine.

From this year until 2026, economic growth will slow down by half a percentage point per year on average. Instead of the originally assumed 2.6 percent, the gross domestic product (GDP) will realistically grow by 2.1 percent. A positive outlook among others: The labor market is likely to recover more quickly after the coronavirus pandemic.

Forecasts revised downwards

This year, according to the WIFO report entitled “Ukraine war clouds the medium-term economic prospects”, the Austrian economy will grow by 3.9 percent – despite the conflict – and thus once again “expand strongly”.

Graphic for the Wifo medium-term forecast

Graphics: APA/ORF.at; Source: WIFO

The reason, like globally, is the rapid recovery after the pandemic. By 2026, as far as the current forecast horizon stretches, however, a continuous weakening to just 1.4 percent is likely to take place. The forecast for the current year has already been revised downwards by one percent.

Unemployment should go down

Despite the slowdown in growth prospects, according to the current forecast, the unemployment rate, mainly due to the increasing shortage of workers, should fall noticeably and already this year at 6.7 percent for the year as a whole, reach the level before the CoV crisis and continue to fall to 6.0 percent by 2026 .

On average, less money was spent during the pandemic and more was saved during the lockdowns in the past two years, the effect according to WIFO: Private consumption should benefit from this and increase by 2.3 percent on average for the year, and by 3.9 percent this year.

Rising energy prices as a damper

In general, the military conflict in Ukraine is increasing economic uncertainty and, above all, is causing energy prices to rise, especially in Austria. “Due to Austria’s greater dependence on Russian natural gas”, the domestic GDP will grow by an average of 0.1 percentage point per year less than in the euro area until 2026, according to the WIFO update on Thursday. In the euro zone, real economic output is expected to increase by just 3.2 percent this year, less than in Austria and well below the last forecast of 4.7 percent.

The strong price increase on the world market, which started in 2021, will be intensified and prolonged in 2022 by the CoV wave in China and the Ukraine war. The rise in prices is being carried primarily by the sharp rise in energy prices. According to WIFO, the CO2 pricing effective from July 1 will contribute about 0.1 percentage points to inflation in Austria.

What’s next for inflation?

Since the energy price increases in European wholesale will only be passed on to private households with a delay, the household energy sector will also contribute to inflation in 2023. For 2022, WIFO expects an average oil price (per barrel of Brent) of 110 dollars (as of Thursday: just under 106 dollars), by 2026 it should fall to 82.5 dollars according to current assumptions.

The inflation rate is expected to be 5.8 percent on average in Austria this year, compared to 2.8 percent in the previous year, and 3.2 percent is also forecast for 2023 over the year. That should also drive the total wages and salaries: this year by 5.8 percent after 5.5 percent in the previous year – next year by 6.1 percent. However, per capita income is likely to fall by 2.3 percent in real terms this year due to high inflation.

Some uncertainties

With regard to the development of the prices for crude oil and natural gas, the premise is still that there will be no major shortfalls or, in the worst case, a delivery stop or that the EU will not decide to stop imports. Due to Austria’s high dependency on Russian natural gas, a more severe economic slump is expected for domestic industry and power generation than in Germany in the event of a delivery stop. According to WIFO, current estimates for Germany would assume a drop in GDP of between 3.0 and 6.0 percent for a scenario involving a gas supply stop or an embargo.

Basically, it says: The war in Ukraine and the further course of the pandemic represent the most important downside risks for the forecast – together with possible negative consequences for the export economy, economic growth in general, the development of employment and income and finally government spending.

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