Austria is losing prosperity and competitiveness

The negative headlines from the Austrian economy are piling up. According to calculations by Statistics Austria, the economy declined in the first half of the year, contrary to expectations. The Economic Research Institute (Wifo) and the Institute for Advanced Studies (IHS) therefore expect economic output to shrink again in 2024 – for the second year in a row for the first time since 1950.

At the same time, the country is losing international competitiveness. In the World Competitiveness Report of the Lausanne-based IMD Institute, it is now only in 26th place out of 67 countries. In a July report, the EU noted a decline in business dynamism, with the rate of new companies being among the toughest in the Union. The OECD also concluded in its recently published Economic Survey that productivity growth has slowed and there is a lack of innovation.

Layoffs and a quarter more bankruptcies than in the previous year

Most alarming, however, is the calculation by the liberal think tank Agenda Austria, according to which real gross domestic product per capita – and thus prosperity – has fallen by 1.7 percent in the past five years. This puts Austria at the bottom of the list in the entire EU. The period was marked by the pandemic and the effects of the war in Ukraine, but the country has evidently coped with these crises worse than other economies.

“We now need a rendezvous with reality,” said Wifo head Gabriel Felbermayr this summer. And this is what it looks like: the two-wheeler manufacturer Pierer Mobility (formerly KTM) is cutting around 500 jobs due to a drop in sales, Infineon Austria is planning to cut almost 400 jobs in the next two years, and 200 employees were recently given notice of termination at the vehicle manufacturer Steyr Automotive. The number of bankruptcies rose by more than 26 percent to 3,300 in the first half of the year.

Above all, industry – the backbone of Austria's economy – is not emerging from the crisis. This is partly due to structural reasons. Because of the high proportion of energy-intensive industry compared to Germany, for example, the country was severely affected by the price increases following the Russian invasion of Ukraine, as Christoph Badelt, long-time rector of the Vienna University of Economics and Business and now president of the Fiscal Council, explains.

But many problems are of our own making. The expansive government spending policy to combat the multiple crises fueled inflation. In Austria, inflation has been above the eurozone average over the past two years. This has led to wages rising more than elsewhere. This is also due to the fact that salaries in Austria are not subject to the free market. Around 98 percent of employees are subject to a collective agreement, and for decades the rule for wage negotiations has been that the average annual inflation and a portion of the increase in productivity are compensated.

According to calculations by the think tank Agenda Austria, the disadvantages have increased almost twice as much since 2023 (according to the forecast by 8.2 percent by the end of the year) as in the euro area (4.4 percent). “In the past, these wage increases could have been offset by increasing productivity,” says the institute's director, Franz Schellhorn. But productivity has hardly increased for years because people in Austria are working less and less.

The country has made part-time work too attractive – or rather full-time work too unattractive. Almost a third of the workforce now only works part-time. This is the second highest rate in the EU. For women, the figure is even more than half. This is mainly due to the often inadequate provision of childcare in rural areas. But the high taxes also prevent many from increasing their workload. Those who double their weekly hours from 20 to 40 only earn 68 percent more net, according to Agenda Austria.

The result is the highest increase in unit labour costs of all Western European industrial locations, explains Schellhorn. According to the Chamber of Commerce, it has been over 30 percent since 2015, 9 percentage points more than in the rest of the EU.

The EU is demanding because of the excessive deficit

For these reasons, a reduction in non-wage labor costs is one of the most urgent demands of companies and business representatives. The Federation of Austrian Industries sees this as the most important measure to strengthen competitiveness. The conservative ÖVP, which sees itself as a business party, is promising such a step in its “growth plan” presented by Chancellor Karl Nehammer on July 10th. However, this is not the first time that this has been proposed. To do this, it needs a majority in the new parliament, which will be elected at the end of September.

The President of the Council of Finance, Badelt, also believes that a reduction in non-wage labor costs makes sense. However, with regard to the budget deficit in the current year, which his committee estimates will be above the Maastricht limit, he points out that this would mean either a further burden on the budget or cuts in benefits. The EU Commission has demanded 2.6 billion euros from Vienna next year. This also makes it more difficult to implement the Chancellor's proposal to abolish taxes on overtime and to grant a “full-time bonus” of 1,000 euros per year.

However, such measures could counteract the shortage of skilled workers, which, according to the latest study by the Chamber of Commerce, affects 82 percent of companies. One of these is the Unger Steel Group, a family-owned company with around 1,600 employees worldwide, including almost 400 at the headquarters in Oberwart in the eastern state of Burgenland.

The company offers attractive conditions with a bistro, sports facilities and flexible working hours, says managing director Matthias Unger. But demands have become higher and job seekers are not very mobile. “It is becoming increasingly difficult to find qualified personnel, especially for assembly work,” says Unger. The training does not meet the needs of industry, he complains. “The imparting of knowledge about artificial intelligence or business education is completely lacking in schools.”

Unger also cites high non-wage labor costs as the main reason why many companies are relocating abroad. But he also sees a need for bureaucratic reform. For example, he wanted to offer in-house childcare at the headquarters in the structurally weak town of Oberwart, but failed due to spatial and hygiene requirements.

The data collection for the sustainability reports required by Brussels also requires a great deal of effort. In principle, Unger sees the EU's environmental goals as an opportunity not only for his company, but also for Austria and Europe. The energy supply in Oberwart is mainly provided by a new photovoltaic system and 90 percent of the raw materials are delivered by rail, explains the company boss. Above all, however, Unger also offers CO₂-reduced “green steel”, which has saved 70 percent of emissions. This is in high demand and is not yet an issue for competitors from China and the USA.

However, Unger criticizes the fact that the reporting requirements on sustainability are disproportionate to the state investment incentives in this area. Austria needs a unique selling point, says the 42-year-old, who is the third generation to run the company. “We have focused on sustainability and climate protection, which is justified.” But so far this has mainly been associated with bureaucratic measures. Now it's about investing.” This also applies to infrastructure such as roads and railways. Many of his employees in Oberwart are dependent on cars due to a lack of competitive public transport connections.

More money for technology and education

Christoph Badelt shares this demand. To improve competitiveness, more investment in technological development and transformation would be necessary. Austria may have a very high research quota, but not particularly good results. In addition, to alleviate the demographically-related shortage of skilled workers, better qualifications are needed, especially for children with a migrant background. However, the government cannot avoid a sustainable restructuring of the state budget in order to be able to raise the resources for these measures.

It is a rendezvous with reality. “In Austria, there is a lack of understanding of how competitive the global economy is and how quickly you can lose a contract,” says industrialist Matthias Unger. At the end of August, when presenting his plans for tax relief, Chancellor Nehammer nevertheless spoke of Austria as one of the most attractive, innovative and productive locations in Europe. That is not entirely true at the moment, says Christoph Badelt.