Statement by the Staff Representative on Austria

Increasing integration to the East has benefited the Austrian economy, but also created vulnerabilities that came to a head with the global financial crisis. The crisis has highlighted old challenges and created new ones that need to be addressed. The banking sector’s return to more normal levels of profitability creates the conditions for a further build-up of high-quality capital and exit from government support. Policies to foster labor market participation by low-skill workers and human capital accumulation would increase long-term growth.

Abstract

Increasing integration to the East has benefited the Austrian economy, but also created vulnerabilities that came to a head with the global financial crisis. The crisis has highlighted old challenges and created new ones that need to be addressed. The banking sector’s return to more normal levels of profitability creates the conditions for a further build-up of high-quality capital and exit from government support. Policies to foster labor market participation by low-skill workers and human capital accumulation would increase long-term growth.

1. This statement provides information that has become available since the Staff Report was circulated to the Executive Board on August 8, 2011. The information does not alter the thrust of the staff appraisal.

2. GDP growth in the second quarter remained strong, but prospects for 2012 have dimmed. While exports, equipment investment, and inventory accumulation slowed down relative to the previous quarter, resilient private consumption and weaker imports resulted in second quarter growth accelerating to 1 percent, up from 0.8 percent in the first quarter, and above the staff forecast of 0.7 percent. Looking forward, the less favorable external environment, including the slowdown in Germany, suggests that the expected deceleration of growth in the second half of the year may be stronger than originally envisaged. Thus, on balance, annual growth for this year is likely to remain close to the 3.3 percent projected in the staff report, while the outcome for 2012 is expected to be less favorable (1.6 percent rather than 1.9 percent). Inflation in July remained elevated (3.8 percent), but favorable commodity price developments and softening demand pressures should bring about the projected decline in price growth in the remainder of the year.

3. While the heightened financial market turbulence in recent weeks did not spare Austria, investors’ perception of Austrian sovereign risk did not deteriorate significantly. The 10-year sovereign spread over German bunds remained volatile around an average of 60 bps in August. CDS spreads rose about 30 bps during the month, broadly in line with changes in German and Dutch spreads. Stock prices and CDS spreads for the two largest Austrian-owned banks registered the generalized stress in the European banking sector, though to a lesser degree than banks with large exposures to the euro area periphery. First half financial results at the three largest banks showed an improvement in banks’ profitability owing to a decline in provisioning expenses while nonperforming loans ratios appeared to be stabilizing.

Austria: 2011 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria
Author: International Monetary Fund