Infection rates and the necessary containment measures are also dominating economic developments in Austria, which is already in its third hard lockdown, a move that is set to remain in place until at least the beginning of February. While the first lockdown, imposed last spring, also led to a historic slump in GDP in Austria with a drop of 11.6% in the second quarter, the third quarter brought a strong recovery with GDP growth of 12.0% according to calculations by the Austrian Institute of Economic Research (WIFO). The Austrian central bank (OeNB) expects the renewed restrictions to lead to a much less pronounced slump in economic output than in the spring, a theory that is supported by less disruption to global value chains, the absence of production shutdowns, learning effects and greater confidence now that the vaccination campaign has been launched. Looking at 2020 as a whole, the Austrian Institute of Economic Research (WIFO) expects GDP to have dropped by 7.3%.
The recent lockdown clearly split the Austrian economy into two halves. The manufacturing sectors of industry proved to be relatively resistant, at least for the time being, and reported largely positive development, also supported by the recovery in global trade originating in Asia. The construction sector also proved to be stable. The service sector, on the other hand, was hit by a sharp downturn. In addition to the official measures imposed, this trend can also be attributed to mounting uncertainty among consumers. The OeNB expects that private consumer spending will have slumped by 8.8% in 2020. As economic activity gradually returns to normal, private consumer demand is expected to rise by 3.9% in 2021. Public consumption showed a slight increase of 0.7% in 2020 and is expected to rise by 1.2% this year. Considerable uncertainty surrounding future economic developments, low capacity utilization levels and a deterioration in equity resources also weighed on investment activity. The Institute for Advanced Studies (IHS) predicts that capital investment will have dropped by 4.9% in 2020. The nature of the recession triggered by the coronavirus pandemic and the economic policy measures taken to counteract the crisis mean that the slump in investment, which is normally extremely sensitive to cyclical fluctuations, is less pronounced than the drop in GDP. In line with the expected international economic recovery, capital investment is expected to expand by 4.1% in 2021. The pronounced economic slump that hit the country’s main trading partners put pressure on the domestic export markets. Goods exports contracted by 7.8% in 2020. The containment measures hit the tourism sector particularly hard, with travel exports expected to have plummeted by 42.5%. As a result, total exports fell by 11.2%. The IHS expects export activity to increase by 5.7% in 2021 as the economy bounces back and the measures to contain the pandemic are eased.
According to the WIFO, the unemployment rate rose by 2.5 percentage points to 9.9% in 2020, despite the widespread use of coronavirus short-time work schemes, a development that was due primarily to poorer employment opportunities in the service sector. In the course of the year, employment demand should pick up, pushing the unemployment rate back down again. The unemployment rate for 2021 is expected to average 9.3%. The IHS is reporting an inflation rate of 1.4% for 2020. After starting 2020 at 2.0%, inflation slowed but remained relatively high against the backdrop of the economic slump. While low crude oil prices put a damper on inflation, the price increase was driven in particular by rent and food prices. The IHS expects inflation to accelerate slightly to 1.6% in 2021. This means that, despite the recovery, inflationary pressure will remain limited for the time being, although it will be significantly higher than in the euro area as a whole.
Due to the pronounced economic downturn and the government deficit created by the extensive fiscal support measures, the debt ratio rose sharply from 70.5% to 83.3% of GDP in 2020, according to the OeNB. The central bank predicts a further increase to 86.4% in the current year.
Bank Austria expects the start of the vaccination campaign at the beginning of the year and the associated prospect of a gradual normalization of economic life to pave the way for a lasting economic turnaround. It expects to see a rebound in the spring of 2021, which will develop into a sustained strong recovery in the second half of the year, allowing GDP growth to rise to 3.1% in 2021. The WIFO expects the economy to grow by as much as 4.5%, although it has reduced its forecast to 2.5% in the event that a fourth lockdown is imposed in the spring.
There are still considerable risks hanging over these forecasts. The biggest risk remains the uncertainty regarding the future course that the coronavirus pandemic will take. Although the outlook is looking brighter now that vaccinations are under way, bottlenecks in vaccine production and distribution as well as lower-than-expected efficacy or weak vaccination willingness, could delay the gradual ramp-up of social and economic life. There is also a risk that a delayed wave of insolvencies will emerge when support measures are discontinued, which could raise doubts as to the stability of the financial sector. There is also, however, potential for a much stronger economic upturn: In addition to the rapid vaccination of the population, global trade has developed much more favorably than expected. Fueled by developments in China, the global economy could start to expand at a much faster pace again, a trend that would also benefit the Austrian economy. Due to the relatively great significance of the tourism and the leisure industry in Austria, swifter success in combating the pandemic could result in a marked increase in the pace of growth in as early as 2021.
According to Helaba, the coronavirus pandemic has not triggered any crash on the Austrian residential property market. Although the pandemic is also leaving its mark on this sector, there are currently no signs of any price correction. According to experts from the real estate service provider RE/MAX Austria, the overall conditions on the real estate market remain positive. 2020 was characterized by a sustained all-time low in interest rates, unabated strong demand among both owner-occupiers and investors, a lack of alternative investment opportunities and a shortage of supply in a large number of regions.
According to the OeNB, the trend toward mounting real estate prices that had already emerged in the course of the year continued in the third quarter of 2020. The values of the current OeNB residential real estate price index on the basis of new and used condominiums and single-family residences show an increase in Austria in the third quarter of 2020 of 9.5% compared to the previous year. In Vienna, prices increased compared to the previous year by 9.4%. In the rest of Austria (excluding Vienna), price developments came to 9.7% during the same period. Prices were driven in particular by single-family residences. The fundamental price indicator of the OeNB for residential real estate shows a further year-on-year increase for Vienna and Austria as a whole in the third quarter of 2020, which points towards an increasingly overheated residential real estate market. According to the consumer price index published by the Austrian statistical office, Statistics Austria, apartment rents rose by 4.1% in 2020. CBRE reports that fears of a slump in demand for vacant and new rental apartments have failed to materialize to date. Demand actually increased further in some areas. Assumptions regarding rent losses due to a slump in the labor market and resulting financial complications for tenants also failed to materialize. Across Austria, RE/MAX experts expect 2021 to be a generally positive real estate year, albeit with a number of changes compared with previous years. Real estate supply and demand are still increasing. As a result, purchase prices for residential real estate are expected to rise overall, but only at around half the rate seen in the past. While condominiums in central locations will remain sought-after in 2021, demand for condominiums on the outskirts of cities is showing even better development. Prices in this segment could rise by 1.9% and 1.2% respectively in 2021. Condominiums in country municipalities are set for a year of stability in 2021, with slight price growth of 0.2% expected to be on the cards. Demand for rental apartments in central locations, on the outskirts of cities and in country municipalities is expected to grow at a slower rate than supply in 2021 with a knock-on effect on rents. The new rents agreed for apartments that are not subject to rent restrictions could be somewhat lower than those agreed in previous years. As far as Vienna is concerned, the real estate service provider EHL expects rent increases in 2021 to be in line with the inflation rate at most, and predicts that apartment purchase prices will increase by between 4% and 5%. With rising demand and dwindling supply, prices for townhouses and apartment complexes in Austria are likely to rise further in 2021, according to Re/MAX. Helaba expects brisk activity to continue on the housing market. In a representative survey, for example, a quarter of respondents said that they plan to move over the next two years, motivated primarily by the wish for a garden or balcony as well as additional space needed as a study.
The Austrian population has increased considerably in the past and will likely continue to grow in the future, too. The latest population forecast produced by the Austrian statistical office, Statistics Austria, suggests that by 2030, the Austrian population will have grown by an estimated 3.9%, from 8.88 million (2019) to 9.23 million. Bank Austria reports that residential construction activity in Austria has been geared toward addressing the marked increase in the demand for homes for some years now. In the period from 2013 to 2019, an average of 61,000 new apartments were built in Austria every year. This is likely to have covered the ongoing need for new construction. Nevertheless, the excess demand in some market segments, especially for affordable rental apartments, is likely to have only been partially reduced. The 2020 economic crisis is expected to boost demand in this segment. If at all, new housing construction is expected to have contracted only moderately in 2020. According to the OeNB, the end of the housing construction cycle, which had already been on the horizon for two years, was exacerbated by the coronavirus pandemic. Helaba concludes from a drop in building permits that, at least in the new construction sector, supply is likely to increase at a slower rate than in the past in the near future. The slump in tourist travel activity due to travel restrictions and curfews has resulted in a marked increase in the supply of small rental apartments, according to ImmoScout24. Apartments that are usually rented out to tourists on a short-term basis made a return to the conventional housing market. It is, however, unlikely that these apartments will remain in the conventional housing market in the long term as tourism activity recovers.
According to EHL, the Austrian real estate investment market once again proved itself to be attractive and crisis-proof in 2020. Real estate worth around € 3.5 billion was traded. While this is down on the boom period from 2017 to 2019, the trend is a positive one in a long-term comparison. The drop as against the record levels seen in previous years was also largely attributable to delays in transaction processing, e.g. due to lockdowns, etc. Residential use accounted for 39% of the transaction volume. Due to the coronavirus crisis, the experts at Catella expect demand for (residential) real estate investments to remain high due to a combination of low interest rates, considerable investment pressure and a lack of alternative investments. Since housing is considered to be one of the beneficiaries of the crisis, alongside the logistics sector, multi-asset investors can be expected to increasingly shift capital from other real estate classes, but also from other sectors, towards residential real estate.