Economic environment

Despite the largest interest rate hikes in 18 months since 1980, neither the US Federal Reserve (Fed) nor the European Central Bank (ECB) managed to get inflation entirely under control in 2023. In the USA, interest rates were raised to 5.5 per cent, the highest level since 2001. In Europe, the historic high since the introduction of the euro was reached in 2023 at 4.5 per cent.

Nevertheless, inflation has already fallen significantly as a result: to around 3.1 per cent in the USA and even below 3 per cent in the eurozone. In Austria, however, inflation remained high for the time being (annual average 2023: over 7 per cent, price increase December 2022/December 2023: 5.6 per cent). Unsurprisingly, the sharp interest rate hikes to combat inflation over the course of the year had an impact on the economy. This is particularly evident in the construction and real estate industry, where interest rates directly impact prices and order volumes. However, the industrial sector is also suffering. The German IFO business climate index stands at a subdued 84.3 points, and the gloom is also clearly noticeable in Austria, where the WIFO economic index turned from a highly positive 10.9 points in April 2023 to a clear minus towards the end of the year, reaching minus 7.9 points in October 2023. Germany and Austria will therefore end 2023 in a “mild” recession.

The labour market remained extremely robust both in the USA and throughout Europe as the weakening economy hardly affected the high demand for labour for the time being. In the eurozone, the unemployment rate even fell from 6.7 per cent to 6.4 per cent over the course of 2023, while in Austria it remained stable at 4.7 per cent (both according to ILO calculations).

A similar trend to the western EU countries also characterised the CEE countries: Hungary’s economic output shrank by 0.3 per cent in 2023, while Poland and Czechia just managed to record slight growth of 0.6 per cent and 0.2 per cent, respectively. However, the inflation trend in the region proved to be a greater burden than the weak economic trend. In Hungary, inflation was still above 25 per cent in the first quarter of 2023, 20 per cent in Poland and 18 per cent in Czechia. After easing over the course of the year, average price increases for the year were still between 10.9 per cent (Czechia) and 17.7 per cent (Hungary).

The stable economic trend in the first half of 2023 while inflation remained high caused yields on the bond markets to rise for a long time, albeit with high volatility. In the course of this development, the yield on the ten-year German government bond, for example, climbed above the 3 per cent mark. Only the significant deterioration in the economic outlook and the general expectation of an interest rate cut in 2024 led to a significant rise in bond prices in the last quarter of 2023 and thus to a decline in yields: ten-year interest rates in Germany fell to below 2 per cent and those in Austria to below 2.5 per cent.