Understanding Recession: Consequences and Implications for Austria’s Economy

Energy price shocks, value creation, loss of purchasing power, economic weakness – when economic experts talk shop, things quickly become complicated. The fact is: the engine of the local economy is sputtering. Austria’s economy is expected to shrink by 0.8 percent in 2023. “Industry is already in recession, but many service sectors have also lost momentum,” says Wifo’s forecast.

What is a Recession?

Recession means decline. If economists from one recession speakthen the economy shrinks. Companies sell fewer products or services because consumer demand declines. A common definition – the technical recession – refers to a recession when the economy shrinks in two quarters in a row.

When this state of negative economic growth persists for a longer period of time, it is called a depression. In all likelihood, there is no need to worry about this in Austria. The economy is expected to grow again as early as 2024 predicts Wifo.

This is calculated with the Gross domestic product (GDP). It measures the value of the services and goods produced in an economy (i.e. a country) over a certain period of time. So if less is produced than in the comparable period, the GDP is negative – the economy is shrinking.

The consequences of a recession…

… for the job market

When companies make less money, they are often forced to cut costs. This is why short-time work or layoffs often occur. Does this happen throughout the economy? This increases unemployment. This can then create a vicious circle. Private households can afford less and therefore spend less money (decreasing consumer behavior), and companies can sell even less.

However, the weakening economy has so far had “hardly any” impact on the labor market, as Wifo stated in its autumn forecast. According to Wifo, the increasing unemployment is mainly due to the higher supply of workers. “Furthermore, companies seem to be more likely to retain workers during a downturn in order to avoid the costly search for personnel during an upswing,” say the economic researchers.

… for real estate

Real estate prices can fall in a recession. If fewer businesses and individuals can afford a loan to buy property or are even forced to sell their property, this can lead to prices falling because there are more available properties on the market.

… for the interest

Normally central banks would cut interest rates in a recession. This makes loans cheaper and investments and demand is stimulated. However, due to persistently high inflation, the monetary authorities are in a quandary.

The European Central Bank has already raised key interest rates ten times last year to the current 4.5 percent in order to get inflation under control. If interest rates were to be lowered too quickly in order to stimulate the economy, there would be a risk of rekindling the slowly declining inflation.

Wifo suspects that the ECB will not raise key interest rates any further. However, they are unlikely to fall in the near future due to ongoing inflation. The economic research institute does not expect interest rate cuts again until 2025.

… for inflation

Inflation can be a trigger for a recession. Rising prices mean people can afford less. This reduces demand, which in turn can lead to a recession. However, falling demand can also be a crucial factor in getting inflation under control.

However, economists disagree about this. Some prominent economists believe that recessions are an effective way to bring inflation back to normal, desirable levels. The ECB has set an inflation target of two percent.

Others are of the opinion that a recession due to central bank interest rate increases will only result if the monetary authorities have overstepped their target.