Journal Issue

Austria: Selected Issues

International Monetary Fund. European Dept.
Published Date:
September 2014
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Pre-Crisis Imbalances and Post-Crisis Growth1

A. Introduction

Austria has come through the global economic and financial crisis relatively well. It is one of the few euro area countries where real GDP and employment are higher than in 2008.

Cumulative Real GDP Growth, 2008-13


Source: IMF WEO database.

Change in Employment, 2008-13


Source: IMF WEO database.

1. This note argues that Austria’s better performance reflects the absence of large precrisis domestic imbalances. In the run-up to the global crisis household and corporate debt levels had remained moderate. The household saving rate had not experienced the sharp drop seen in countries with housing booms, but had in fact increased.2 Growth of government spending had remained modest, and as a result there were buffers to weather the crisis. Households could smooth consumption, letting the household saving rate decline.3 Firms were not under severe pressure to cut costs, and could absorb demand shocks through lower profit margins and keep employment relatively stable; and the government could act counter-cyclically, in contrast to boom-bust countries which were forced to consolidate strongly.

B. Non-Financial Corporate Sector4

Pre-Crisis Years

2. In many countries the non-financial corporate debt-to-GDP ratio increased sharply in the pre-crisis years. Debt increases were the counterpart of corporate saving-investment shortfalls, as booming investment could not be funded from retained earnings only. By 2007, corporate debt was high particularly in Spain, Ireland and Portugal, and additionally there were rapid debt increases in the Baltics leading up to the crisis. In these countries, much of the debt surge was the result of a boom in the non-tradable sector, in particular in construction.

Change in Corporate Debt to GDP Ratio, 2002-07

(Percent of GDP)

Source: Haver Analytics. Corporate debt includes securities other than shares and loans.

3. At the same time, profit shares eroded in a number of countries as competition and overheating labor markets increased wage bills and reduced profit margins. This was, however, certainly not an issue in all countries: in more than half of the countries, profit margins increased. These differences reflected the overheating of labor markets. Wage growth was most rapid in the Baltics and Romania, and the most restrained in Germany, Switzerland, and Austria.

Change in Compensation per Employee, 2002-07


Source: Haver Analytics.

4. The combination of declining profits and increasing debt made the corporate sector in some countries vulnerable.

  • Firms with a large gap between corporate saving (retained profits) and investment depended on the continued flow of new financing, which could suddenly dry up.

  • If global conditions were to deteriorate, the combination of rising debt and declining profitability could also make it more difficult to roll over existing debt.

Change in Corporate Profit Shares, 2002-07

(Percentage points)

Source: Haver Analytics. Profit shares are gross operating surplus as a percent of gross value added.

5. On both fronts Austria was different: the increase in corporate debt was modest, and profitability increased moderately.5 Corporate debt to GDP grew by 2 percentage points only between 2002 and 2007, and the share of short-term debt to total securities remained constant.

6. It is an interesting question why Austria did not have a corporate borrowing boom.

  • One reason is that increased corporate profitability had boosted availability of internal financing. Firms also increased equity financing as a reaction to the low equity ratio of the Austrian corporate sector.

  • Another reason may have been the behavior of Austrian banks. During the pre-crisis boom years, Austrian banks expanded aggressively—but in CESEE, not in Austria. Incentives to expand in the two markets were very different: banking in CESEE was very profitable, while profitability in the domestic Austrian market is structurally low.

  • Another reason may have been that Austria did not benefit from interest rate convergence—the interest rate differential with Germany was already near zero in the mid-1990s.

Long-Term Interest Rate Differential with Germany

(Percentage points)

Source: IMF WEO database. Nominal long-term bond yields.

The Crisis

7. Once the global crisis hit and capital flows dropped, the large saving-investment shortfalls were no longer sustainable, and during the next few years firms managed to reduce the gaps substantially. Countries that had larger imbalances typically suffered more acute crises which were reflected in a more severe contraction of the non-financial corporate sector.

Change in Corporate Investment, 2007-09


Source: Haver Analytics.

8. The gaps were partly closed by reducing investment. There was a large variation in the drop of investment, ranging from 8 percent in Romania to 82 percent in Lithuania in the immediate aftermath of the crisis.

9. In many countries, the gap was further closed by boosting corporate saving through slashing costs to improve profits.6 Unprofitable production capacity was shut down and employment was slashed to save costs and restore profit margins. The result of this corporate adjustment was high unemployment and a sharp decline in production. The unemployment rate jumped by 7 percent or more in the Baltics, Ireland and Spain between 2007 and 2009.

  • The increase in profit margins was largest in countries that had seen the largest increase in debt and the biggest deterioration of profits in the pre-crisis period. The Baltics, Ireland and Spain saw increases in profit margins above 5 percentage points between 2008 and 2012.

  • By contrast, in countries that did not experience a corporate borrowing binge, and where corporate profitability had not deteriorated, profit margins declined during the crisis, as firms held on to their workforce.

10. Austria fell in this latter category. In Austria firms did not need to slash costs, and employment remained relatively stable. Firms instead absorbed costs of a temporarily under-utilized workforce, and corporate profit shares fell during the crisis. A similar experience occurred in other countries where employment held up relatively well, such as Germany and the Netherlands.

Increase in Unemployment Rate, 2007-09

(Percentage points)

Source: Haver Analytics.

Change in Corporate Profit Shares, 2008-12

(Percentage points)

Source: Haver Analytics. Profit shares are gross operating surplus as a percent of gross value added.

C. Households Pre-Crisis

11. Many EU countries experienced credit/housing price booms during the pre-crisis years which boosted consumption, increased household debt and led to a sharp decline in the household saving rate. The boom was most pronounced in Spain, Ireland, Portugal, the UK and Eastern Europe. The drop in household saving rates exacerbated the boom, with household saving rates behaving very pro-cyclically in some countries. In Estonia, for example, household saving rates dropped to a trough of -6 percent between 2002 and 2007, even though incomes were growing by up to 20 percent.7

12. This boom made households vulnerable:

  • As household saving had become negative in a number of countries, household consumption levels could only be maintained with continued flows of new financing.

  • Household debt had gone up on the back of rising asset valuations. While household net worth was not a problem as long as housing prices remained high, a fall in housing prices would lead to a sharp drop in net worth, and to a problem with debt overhang.

Change in Household Gross Saving Rate, 2002-07

(Percentage points)

Source: Haver Analytics. Data includes households and NPISH. Calculated as gross savings as a percent of gross disposable income.

Increase in Household Debt to GDP Ratio, 2002-07

(Percentage points)

Source: Haver Analytics.

13. In a number of countries, which included Austria, there was no credit/housing boom and household saving did not decline. In Austria housing prices remained flat, household borrowing was modest, and its saving rate increased rather than declined.

The Crisis

14. When the crisis hit, this housing price/credit boom came to a sudden end. Between 2007 and 2009, countries that had seen large housing price increases now saw a sharp drop.

Housing Price Index Increase, 2007-2009


Source: Eurostat. Austria data from Haver Analytics.

15. Large wealth losses and drying up of new funding forced households to reduce their consumption and increase their saving. It was not just that the absence of new funding made it no longer possible to sustain negative saving rates; the large wealth losses and the increased costs of rolling over existing debt made households keen to reduce their debt burden.

Change in Household Gross Saving Rate

(Percentage points, 2007-09 vs 2002-07)

Source: Haver Analytics.

16. Thus, households could not smooth consumption; instead the increase in their saving rates exacerbated the recession. The increase in saving rates was in some cases quite dramatic, for example in Latvia where rates jumped by over 11 percent in the immediate aftermath of the crisis.

17. In countries where households had not gone on a borrowing binge pre-crisis, household saving rates behaved less pro-cyclically. Indeed, there is a strong correlation between the decline of household saving rates pre-crisis, and their subsequent increase. Countries where household saving rates dropped the most saw the biggest jump during the crisis.

18. Austria was in this category: households reduced their saving rate, mitigating the decline in consumption. Consumption growth remained positive in 2009, and in fact was (marginally) faster than in 2007. German and French households smoothed consumption in a similar fashion.8

Change in Gross Saving Rate and Unemployment

(Two-year percentage point change)

Source: Haver Analytics. Gross savings are a percent of disposable income.

19. Since the crisis, housing prices in Austria have risen rapidly although household debt has not increased much.

  • Housing prices in Austria have gone up sharply since 2008 and could potentially contribute to a reduction of the saving rate. Housing prices increased cumulatively by 35 percent between 2008 and 2013, with an even more rapid increase of 56 percent in Vienna—amongst the highest in the EU since the crisis. Increases may reflect in part a flight to real assets by households and foreigners, as well as increased demand due to immigration.9

  • Over this period, household debt has risen moderately in Austria. This contrasts with other countries where housing prices have increased rapidly (Norway and Sweden), and household debt has also grown very quickly.

Housing Price Index Increase, 2008-12


Source: Eurostat. Austria data from Haver Analytics.

D. The Public Sector

20. As discussed in the first Selected Issues Paper, in the pre-crisis years, in many countries the private sector boom indirectly contributed to a public spending spree, as a surge of boom-related tax revenues generated room to boost public expenditure. When the private sector boom ended, tax revenues dropped sharply, forcing the governments to retrench.

Change in Household Long-Term Loans, 2008-12


Sources: Haver Analytics.

21. In contrast, Austria’s public sector provided a counter-cyclical balance that was crucial in maintaining stability during the crisis, thereby dampening its impact. Austria’s expenditure had remained under control during the boom years, thus there was no need to retrench during the crisis—and in fact there was room for countercyclical policy.

Average annual government expenditure growth

(2002-09, in percent)

Average annual government expenditure growth

(2009-12, in percent)

Prepared by Aaron Thegeya.

The household gross saving rate increased from 12.9 percent in 2002 to 16.4 percent in 2007. The household gross saving rate is defined as gross savings of households and non-profit institutions serving households as a percent of gross disposable income.

The household gross saving rate declined to 12.1 percent in 2011.

This section borrows from Bakker and Zeng (2014).

Austria’s corporate sector is dominated by the manufacturing and trade industries, which together comprised 65 percent of turnover in 2012. (See OeNB, “Structural Business Statistics 2012, Preliminary Results”, 2013). A large share of Austria’s manufactured output is exported, with manufactured exports comprising 38 percent of total exports. About half of Austria’s exports are to euro area countries, with the dominant partner, Germany, accounting for close to a third of Austria’s exports. Exports within the euro area do not carry exchange rate risk.

See International Monetary Fund (2014) Jobs and Growth: Supporting the European Recovery, p. 39.

For a discussion of the behavior of household saving rates during the crisis, see also Bakker and Felman (2014).

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