WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

In Q1 2024, real GDP grew by 5.4% year on year, following 4.9% in Q4 2023. The high growth rate in Q1 should partly be viewed against the low basis from Q1 2023, when the economy declined by 1.6%, which means that growth will probably slow somewhat in annual terms as the year progresses. Nevertheless, the underlying growth momentum remains strong, prompting us to raise our growth forecast for 2024 once again – to 3.2% (from 2.8% in spring). Since December 2023, the policy interest rate has been kept at a very high 16%; but this has still not been enough to cool the economy, which remains clearly overheated. Inflation has been hovering at around 8% in annual terms, driven primarily by ongoing high real wage growth amidst further labour-market tightening: in April, the unemployment rate (LFS) dropped to another all-time low of 2.6%. On the external front, increased US pressure on banks from third countries (such as China, Turkey and the UAE) to discourage them from receiving payments from Russia has resulted in a marked decline in imports from these countries. For instance, merchandise imports from China – which accounts for nearly half of total Russian imports – fell sharply in both March and April (year on year), with dual-use products hit particularly hard. Although alternative payment channels will likely be found eventually, these will entail extra costs, which will serve to fuel inflation still further. In 2025-2026, growth is projected to slow to around 2.5%, with tight monetary conditions and further rising labour shortages ultimately weighing on economic dynamics.