COVID-19-induced recession: biggest economic policy challenge for Austria in the “Second Republic”

The lockdown measures adopted to contain the COVID-19 pandemic have sent economies worldwide into a deep recession. For the Austrian economy, the OeNB’s projections imply a decline by about 13½% in the first half of 2020, but a visible revival already in the second half of the year. In general, the projections are based on two key assumptions: first, that we are not going to see a second wave of infections in the fall of 2020, and second, that coronavirus drugs or vaccines will be available by mid-2021. Based on these assumptions, real GDP in Austria is expected to contract by 7.2% in 2020, but to recover some lost ground thereafter with growth rates of 4.9% in 2021 and 2.7% in 2022. This means that it will take until 2022 for real GDP to return to pre-pandemic levels. The unemployment rate (Eurostat definition) is projected to rise to 6.8% in 2020 before dropping to 5.3% in 2022. HICP inflation is expected to sink to 0.8% in 2020, remain at this level in 2021 and re-accelerate to 1.5% in 2022. The general government deficit (Maastricht definition) is forecast to rise to 8.9% of GDP in 2020, reflecting comprehensive temporary fiscal stimulus packages and automatic stabilizers, before shrinking markedly to 1.5% of GDP in 2022.