Abstract
Austria’s recession had limited effects on unemployment. Investment declined sharply but consumption helped cushion the recession, supported by tax cuts and various labor market measures together with large increases in real wages. Austria’s fiscal position has weakened significantly in recent years, although to a lesser extent than the euro area average. The authorities’ plan to embark on a decisive fiscal consolidation path is welcomed. They recognized, however, that reducing the share of foreign exchange loans, while providing continued financing to central and southeastern Europe, will be challenging.
The Austrian authorities appreciate the consultations with the Fund and commend the staff for the high quality of the staff report. They broadly concur with the staff’s assessment of Austria’s economic situation and its general recommendations on economic, fiscal and financial policies.
The staff report shows that the worst of the past recession is over and all macroeconomic indicators, including on employment and unemployment, are improving. The main challenge is to consolidate the fiscal position without hampering the growth potential, whilst maintaining the social balance. We also note the Fund’s interest in the Austrian financial system and its engagement in CESEE.
Short-term and medium-term outlook
Most recent data show that Austria, which suffered from a severe decline of exports last year, is now benefiting from the resumption of international trade. This has brought capacity utilisation in manufacturing back close to average, which gives confidence that investment activity could also turn around towards the end of the year. Private consumption showed continued moderate growth throughout the crisis, not least thanks to substantial fiscal stimulus measures. The short-term outlook for the remainder of the year is positive, as tourism could also gain market shares. Notably, also some CESEE countries benefit from the current improvement of economic activity, while some others are still in the stage of adjustment, as rightly stated in the staff report.
The staff report points at factors which might lower GDP-growth in the medium to long-term. While not giving rise to major concerns or questions about the growth model of Austria, these factors will be monitored and taken into account, when formulating the medium-term economic and fiscal strategies.
Fiscal policy
At 3.5 % and 4.7 % of GDP in 2009 and 2010, the general government deficit reflects the biggest stimulus package ever and the operation of automatic stabilizers. Even if the absolute level of the deficit has remained below the euro area average thanks to the relatively good performance before the crisis, the government is firmly committed to embark on a decisive consolidation path. In line with the staff report and European procedures, fiscal consolidation will start in 2011. Current plans provide for a fiscal deficit of 2.3 % of GDP in 2014, thus well below the staff’s medium-term macroeconomic framework. With the new budget framework law in place at the federal level, expenditure ceilings for the years to 2014 have already been set by Parliament. The spending ministries are currently developing instruments to cope with the ceilings, which will be implemented with the 2011 federal budget, scheduled for adoption by the end of the year. The authorities could agree with the staff that consolidation should focus more on the expenditure side, but other factors necessitate also measures to raise revenues.
Financial sector
In 2009, market confidence in Austrian banks was restored, owing to public financial support and a more favourable environment created by stepped up central bank liquidity operations as well as EU/IMF programs in CESEE. At year-end 2009, the banking sector reported a recovery in bottom-line profitability despite higher risk costs, and capitalization levels continued to improve on the back of capital increases and deleveraging. The new Basel requirements will, however, make a further strengthening of Austrian banks’ capital position necessary.
As evidenced by the latest OeNB stress tests, the Austrian banking sector has shown resilience to risk. The results of the CEBS stress testing exercise confirmed this assessment for the major banks, even though Austrian banks were subjected to a more severe CESEE scenario than their competitors. Furthermore, the disclosure of sovereign portfolios revealed only a comparatively low direct exposure of Austrian banks to Euro area countries that have come under market scrutiny.
As of today, it is noteworthy that irrespective of market turbulences, Austrian banks have lived up to their commitment as long-term investors in CESEE. The responsible role played by foreign banks in CESEE should also be considered in the discussion on the introduction of banking taxes in the region - disproportionately high tax levels will certainly not be helpful for its recovery process and its banking systems. Austrian banks were among the most active banks in the European Bank Coordination Initiative and continue their cooperation under the auspices of the EBRD in the “Vienna Initiative Plus”. In this respect, Austria has taken a prominent role to contribute to the solution of the FX lending issue in CESEE by agreeing with banks on a set of guidelines to curb the most risky forms of foreign currency lending in CESEE. A level playing field - to be achieved via the “Vienna Initiative Plus” - will be essential for the long-term success of these measures. In the domestic market, the Austrian authorities, in 2010, imposed a de-facto ban on foreign currency loans to un-hedged private households in Austria, after a string of softer measures proved to be insufficient.
We agree on the importance of keeping the financial sector support package in place for the time being and of closely monitoring the withdrawal of monetary stimulus measures, as the banking sector still faces a challenging environment. This concerns inter alia the refinancing of maturing bonds, the unfolding of credit risks in Austria as well as in CESEE, the sustainability of current operating profitability levels and the challenges arising from regulatory changes.