PUBLISHED May 28, 2026
The War’s Price Tag: Half a Percentage Point of Growth
According to “IHS Konjunkturprognose Frühling 2026 – Iran-Krieg bremst die Konjunktur”, the spring forecast published by the Institut für Höhere Studien on 10 April 2026, Austria’s economic recovery is being materially disrupted by the fallout from the Iran War. The IHS has downgraded its 2026 GDP forecast to 0.5 percent and its 2027 forecast to 0.8 percent — a recovery path that would have been considerably stronger had the conflict not erupted.
The institute’s counterfactual calculation is striking in its precision: without the Iran War, Austria’s economy would have grown by 0.5 percentage points more in 2026 and 0.3 percentage points more in 2027. Inflation, meanwhile, would have been 0.9 percentage points lower this year and 0.2 points lower in 2027. These figures do not represent uncertainty ranges — they are the IHS’s best estimate of the direct economic cost of the conflict, based on market energy price expectations as of 20 March 2026.
Where Austria Stands Coming In
Before assessing where the economy is headed, the IHS provides important context about where it came from. After two consecutive years of GDP contraction, Austria returned to growth in 2025, expanding by 0.6 percent. The recovery was uneven: a strong opening to the year faded as the economy slowed to just 0.3 percent growth in the third quarter and stagnated in the final quarter.
The drivers of 2025’s modest expansion were public consumption and equipment investment — the latter surging by a striking 5.0 percent, driven by favorable financing conditions, pent-up replacement needs, and a nascent recovery in industrial activity. Private consumption grew by 0.5 percent. Construction investment continued its now multi-year decline, falling by 2.9 percent. The industrial recession, which had weighed heavily on the economy, finally came to an end.
The early months of 2026 were pointing toward a continuation of this cautious recovery. Then the Iran War broke out.
The Energy Price Shock in Numbers
The IHS forecast is anchored in a specific set of energy price assumptions, making it more transparent — and more falsifiable — than many comparable projections. Based on market expectations as of 20 March, the institute projects oil peaking at around $107 per barrel in the second quarter of 2026, before declining to a full-year average of $92.50. For 2027, the average falls further to $80.70 — still well above the $69.20 recorded in 2025.
Gas prices follow a similar but more persistent pattern. From a 2025 average of €37 per megawatt-hour, prices are expected to spike to nearly €60 in the second quarter before settling at a 2026 average of €54. In 2027, gas remains at an elevated €46. This stickiness in gas prices — relative to oil — reflects the structural damage to Middle Eastern production and transport infrastructure, which cannot be repaired as quickly as oil flows can be rerouted.
These energy price assumptions flow directly into the inflation forecast. The IHS projects average consumer price inflation of 2.9 percent in 2026 and 2.4 percent in 2027 — both comfortably above the ECB’s 2 percent target. The March CPI reading already reflected the spike in fuel prices, while the full pass-through of higher gas, fertilizer, and transport costs into food and goods prices is expected to unfold gradually through the remainder of the year.
The IHS forecast table provides a granular decomposition of expected economic performance that is worth examining closely. Private consumption is projected to grow by just 0.5 percent in 2026 — unchanged from the 2025 figure, and below the level needed to meaningfully support the broader recovery. With real household incomes squeezed by rising inflation, the savings rate is expected to fall only modestly, from 9.9 percent in 2025 to 9.3 percent — suggesting that households will absorb higher prices partly by saving less, but will not dramatically increase spending.
Equipment investment, which had been one of the brightest spots in the 2025 data, is expected to slow sharply to 1.5 percent growth in 2026. The culprits are familiar: weaker domestic and international demand, elevated uncertainty, rising capital market interest rates, and deteriorating financing conditions. Construction investment continues its long decline, with the IHS projecting a further 1.9 percent contraction in 2026 and a 1.0 percent fall in 2027. Residential construction remains the most troubled segment, with rising borrowing costs and declining building permits pointing to continued weakness.
On the external side, goods exports are expected to recover modestly — growing 0.6 percent in 2026 and 2.0 percent in 2027. This modest optimism rests on productivity-oriented wage settlements in industry, improving order intake data, and an expectation that Austrian exporters can regain some competitiveness. However, the IHS acknowledges that world trade is expected to grow by just 0.2 percent in 2026 — a dramatic deceleration from 4.4 percent in 2025 — leaving little tailwind for export-oriented businesses.
The IHS forecast table provides a granular decomposition of expected economic performance that is worth examining closely. Private consumption is projected to grow by just 0.5 percent in 2026 — unchanged from the 2025 figure, and below the level needed to meaningfully support the broader recovery. With real household incomes squeezed by rising inflation, the savings rate is expected to fall only modestly, from 9.9 percent in 2025 to 9.3 percent — suggesting that households will absorb higher prices partly by saving less, but will not dramatically increase spending.
Equipment investment, which had been one of the brightest spots in the 2025 data, is expected to slow sharply to 1.5 percent growth in 2026. The culprits are familiar: weaker domestic and international demand, elevated uncertainty, rising capital market interest rates, and deteriorating financing conditions. Construction investment continues its long decline, with the IHS projecting a further 1.9 percent contraction in 2026 and a 1.0 percent fall in 2027. Residential construction remains the most troubled segment, with rising borrowing costs and declining building permits pointing to continued weakness.
On the external side, goods exports are expected to recover modestly — growing 0.6 percent in 2026 and 2.0 percent in 2027. This modest optimism rests on productivity-oriented wage settlements in industry, improving order intake data, and an expectation that Austrian exporters can regain some competitiveness. However, the IHS acknowledges that world trade is expected to grow by just 0.2 percent in 2026 — a dramatic deceleration from 4.4 percent in 2025 — leaving little tailwind for export-oriented businesses.
The IHS projects employment growth of 0.2 percent in 2026 and 0.4 percent in 2027 — positive, but insufficient to make a meaningful dent in unemployment. The national unemployment rate is forecast to tick up slightly to 7.5 percent in 2026 — one tenth of a percentage point above 2025 — before edging back to 7.4 percent in 2027. By the Eurostat definition, unemployment remains at 5.7 percent and then 5.6 percent. Wage growth is expected to decelerate significantly, from 3.6 percent in 2025 to just 2.0 percent this year, partly reflecting the more moderate collective bargaining outcomes the IHS expects to follow from weaker economic conditions.
On the fiscal side, the IHS projects a general government deficit of 4.2 percent of GDP in 2026 and 4.1 percent in 2027 — unchanged from 2025. The better-than-expected federal spending outcome last year improves the starting position somewhat, but weakening growth and the associated reduction in tax revenues largely offset that advantage. Austria’s path toward fiscal sustainability remains a medium-term challenge rather than an imminent crisis, but the numbers leave little margin for additional spending commitments.
One of the most valuable features of the IHS spring forecast is its explicit alternative scenario — a disciplined attempt to quantify the downside risk if the Iran War escalates further. In this scenario, oil and gas prices peak higher and remain elevated for longer than in the baseline. The result: GDP growth falls to 0.3 percent in 2026 and 0.7 percent in 2027, while inflation climbs to 3.1 percent this year and remains at 2.8 percent in 2027.
The gap between the baseline and the alternative scenario is not catastrophic in headline GDP terms — but the inflation differential matters enormously for real household incomes, wage dynamics, and ECB policy. An inflation rate persistently above 3 percent would almost certainly prompt the ECB to raise interest rates, tightening financing conditions at precisely the moment when businesses need credit to weather the energy shock. That secondary tightening effect is where the real economic damage of the alternative scenario would be felt most acutely.
The IHS closes its spring forecast with a characteristic challenge to Austrian policymakers. The risks are real and the uncertainty is high — but the institute notes that crises can also be catalysts. If the current disruption is used as an opportunity to accelerate structural reforms that have long been deferred — labor market flexibility, regulatory simplification, investment in energy transition infrastructure — Austria could emerge from this period with productivity gains that provide lasting support to growth.
It is a message that sits uncomfortably alongside the immediate pressures of rising prices and weakening demand. But the IHS has always framed short-term forecasting within a longer-term structural lens, and this forecast is no exception. The question is not only whether Austria can navigate 2026 intact — it is whether the country will use the turbulence of the present moment to build a more resilient economic foundation for the years ahead.
The IHS projects employment growth of 0.2 percent in 2026 and 0.4 percent in 2027 — positive, but insufficient to make a meaningful dent in unemployment. The national unemployment rate is forecast to tick up slightly to 7.5 percent in 2026 — one tenth of a percentage point above 2025 — before edging back to 7.4 percent in 2027. By the Eurostat definition, unemployment remains at 5.7 percent and then 5.6 percent. Wage growth is expected to decelerate significantly, from 3.6 percent in 2025 to just 2.0 percent this year, partly reflecting the more moderate collective bargaining outcomes the IHS expects to follow from weaker economic conditions.
On the fiscal side, the IHS projects a general government deficit of 4.2 percent of GDP in 2026 and 4.1 percent in 2027 — unchanged from 2025. The better-than-expected federal spending outcome last year improves the starting position somewhat, but weakening growth and the associated reduction in tax revenues largely offset that advantage. Austria’s path toward fiscal sustainability remains a medium-term challenge rather than an imminent crisis, but the numbers leave little margin for additional spending commitments.
One of the most valuable features of the IHS spring forecast is its explicit alternative scenario — a disciplined attempt to quantify the downside risk if the Iran War escalates further. In this scenario, oil and gas prices peak higher and remain elevated for longer than in the baseline. The result: GDP growth falls to 0.3 percent in 2026 and 0.7 percent in 2027, while inflation climbs to 3.1 percent this year and remains at 2.8 percent in 2027.
The gap between the baseline and the alternative scenario is not catastrophic in headline GDP terms — but the inflation differential matters enormously for real household incomes, wage dynamics, and ECB policy. An inflation rate persistently above 3 percent would almost certainly prompt the ECB to raise interest rates, tightening financing conditions at precisely the moment when businesses need credit to weather the energy shock. That secondary tightening effect is where the real economic damage of the alternative scenario would be felt most acutely.
The IHS closes its spring forecast with a characteristic challenge to Austrian policymakers. The risks are real and the uncertainty is high — but the institute notes that crises can also be catalysts. If the current disruption is used as an opportunity to accelerate structural reforms that have long been deferred — labor market flexibility, regulatory simplification, investment in energy transition infrastructure — Austria could emerge from this period with productivity gains that provide lasting support to growth.
It is a message that sits uncomfortably alongside the immediate pressures of rising prices and weakening demand. But the IHS has always framed short-term forecasting within a longer-term structural lens, and this forecast is no exception. The question is not only whether Austria can navigate 2026 intact — it is whether the country will use the turbulence of the present moment to build a more resilient economic foundation for the years ahead.
