Austria: 2018 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Austria

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Austria


2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Austria

Recent Developments

1. The Austrian economy is robust. After several years of slow growth, output accelerated markedly in 2016/17, the public debt-to-GDP ratio has begun to fall, unemployment has declined, and the financial sector has been strengthened.

2. Growth has picked up markedly and has been broad-based. GDP expanded by 3 percent in 2017, and by 3.1 percent (y/y) in 2018: Q1, boosted by income tax cuts in 2016, higher public spending on refugees and a recovery in private investment in 2017, laying the foundation for continued robust expansion. A favorable external environment contributed to strong net exports as growth in Europe accelerated more broadly. Consumer and business confidence indicators have surpassed levels observed before the GFC. Employment growth has accelerated, catching up with the rising labor supply from migration and higher labor force participation. As a result, unemployment has begun to decline recently, to 7.7 percent in May.1 At 2.1 percent y/y in May, inflation has decelerated slightly from its peak in 2017: H2.



(Year-on-year percent change)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: National authorities; and IMF staff estimates.

3. The fiscal outturn in 2017 was better than expected. The structural deficit stood at 0.6 percent of GDP, lower than anticipated in the budget (0.8 percent), and the headline deficit was 0.7 percent of GDP against the budgeted 1.2 percent, largely due to the higher-than-anticipated economic growth, but also due to savings on interest payments. Public debt fell by 5 percentage points, to 78.5 percent of GDP, supported by the strong growth and asset recoveries of intervened banks.

4. The financial system is stronger and better capitalized than in recent years. Large banks’ capital levels have been increased, and risks have been reduced. Profitability has risen, largely due to reduced risk provisions, while banks have continued their cost-cutting efforts. The supervisory framework has been strengthened, including through the creation of a legal basis for using real-estate specific macroprudential measures.

5. Refugee inflows remain low. Arrivals of refugees have slowed sharply since 2015, and processing of asylum applications is catching up. Significant challenges remain in integrating accepted asylum seekers into the labor market, such as language barriers and low skills. At the same time, the new government is tightening acceptance criteria, and is considering curtailing asylum seekers’—both in process and recognized—access to social benefits.

6. The external position remains broadly in line with fundamentals and desirable policies (Annex I). Using the External Balance Assessment estimates, at 2 percent of GDP in cyclically-adjusted terms the current account balance was close to the estimated norm of 1.8 percent of GDP in 2017. Model-based estimates suggest that the real effective exchange rate (REER) was modestly overvalued by about 7½–10¼ percent. However, these estimates do not consider the economy’s cyclical position. Moreover, the unexplained residual is large. Therefore, staff analysis suggests an indicative REER gap of -1.2 percent which is assessed as broadly consistent with fundamentals.

7. Political situation. In early parliamentary elections in October 2017, the center-right Austrian People’s Party, under its new leader Sebastian Kurz won the most seats. It has formed a coalition government with the far-right Freedom Party. The new government is broadly continuing and, in some areas, accelerating economic reforms that its predecessor has initiated, but has scaled back some labor market measures, notably subsidies for new private sector employment and public-sector jobs for older long-term unemployed.

Outlook and Risks

A. Outlook

8. Growth momentum remains strong in the near term, but output is forecast to converge toward its potential level in the medium term. In 2018, GDP growth is projected to remain strong, at 3 percent, as accelerating consumption and net exports more than offset the declining contribution of investment. This will open a positive output gap, and growth in 2019–23 is then projected to slow gradually, before settling at its potential rate of about 1¾ percent beyond the projection horizon. This is slightly higher than previously estimated, on account of a pick-up in investment, somewhat faster TFP growth, and higher labor force participation. With the output gap mildly positive, inflation is expected to run slightly above 2 percent in the medium term.

B. Risks

9. Risks to the outlook are largely external and would likely have a limited impact if they were to materialize (Annex II). Key risks are:

  • Retreat from cross-border integration. Increasingly inward-oriented economic policies in some trading partners and reduced international policy coordination and collaboration would leave Austria, a very open economy, vulnerable directly and indirectly through export, FDI, and confidence channels.

  • Structurally weak growth in advanced economies and emerging markets. This would make fiscal consolidation and debt reduction more difficult. Also, a deceleration in Central, Eastern, and Southeastern European (CESEE) countries, which take 21 percent of Austria’s exports and with which its banks have extensive financial relations, could affect financial system stability directly and the economy more broadly.

  • Integration of immigrants. If efforts to integrate immigrants were unsuccessful, this could reduce their contribution to the economy, slowing growth and increasing welfare spending.

However, with 70 percent of Austria’s exports going to the European Union (EU), where the European Single Market provides a stable framework, the impact of these risks is contained. Also, stronger capital buffers and declining financial sector exposure to CESEE, by divestments as well as the shift of Bank Austria’s CESEE operations to its parent bank in Italy (Unicredit), are containing vulnerabilities.

10. Austria’s direct financial exposure to developments in Italy is limited, but indirect adverse effects cannot be ruled out. Austrian bank’s exposure to Italy is small (about 1.3 percent of total foreign claims). Also, the strengthening of capital levels, adequate and stable liquidity, and limited reliance on wholesale funding would provide a buffer. However, confidence effects could be important.

Authorities’ Views

11. The authorities broadly concurred with staff’s assessment of the outlook. However, the Ministry of Finance considered the economy’s medium-term potential growth rate to be higher, at about 2¼ percent, and also saw room for higher growth in 2018. With regard to risks, the authorities emphasized that Austria was dependent on open access to markets, and were concerned about potential disruptions to trade, including through sanctions. They also stressed the potentially adverse impact on confidence, which could have wider repercussions on investment and the financial sector. The authorities also pointed to increasing environmental risks arising from climate change, which already had an impact on their tourism industry. With regard to migration, they agreed that integrating immigrants into the labor market was key to domestic security and prosperity. They pointed to some successes in their integration programs but noted that challenges remained large.


The overall outlook is robust. Creating fiscal space to prepare for rising costs of an aging population in the longer term requires structural reforms. While unemployment is falling, labor market policies require attention. Financial stability risks, including from housing market developments, appear contained, but banks’ cost cutting efforts need to continue.

A. Fiscal Policy and Reforms

12. The current strong economic environment offers an opportunity to fortify the economy’s foundations further. Priorities include (i) creating fiscal space to accommodate the cost of an ageing society, and (ii) boosting the economy’s growth potential. Both are interrelated, and require a package of measures that, in combination, can ease long-term fiscal pressures and raise growth while protecting Austria’s strong welfare state.

13. The authorities intend to achieve a structural surplus over the medium term, and a significant reduction in expenditure and revenue as a share of GDP (Box 1). The 2018/19 budget aims to achieve overall balance by 2019, and the authorities’ Stability Program envisages small surpluses thereafter, based on spending reductions across the board, even as revenue is projected to decline.

Stability Program

In May, the authorities passed a budget for 2018 and 2019 at the same time, since the new government took office only in December 2017, too late to draft a budget for the whole of 2018.

The new government’s medium-term fiscal plans are ambitious. Key goals are a faster reduction of public debt than previously envisaged, and a reduction of the tax and contributions burden ‘toward 40 percent’. After relatively modest measures in 2018/19, the authorities are planning a comprehensive tax reform for 2020.

Revenue is projected to decline by 1¼ percentage points over the next five years, on account of a reduction in indirect tax revenue (largely other than VAT), social security contributions, and other revenue. Specific measures include a reduction of unemployment insurance contributions for low-income earners, a reduction of VAT on overnight stays, and an increase in income tax relief for families with children. Further measures planned from 2020 onward aim to reduce the tax burden on low incomes, as well as on corporates.

Expenditure is set to decline by 2.4 percentage points of GDP. Savings are envisaged across the board, largely through efficiency gains in the public administration (including in the health system), avoidance of overbudgeting, cuts in personnel costs, and lower spending on social benefits, due to strong performance of the economy. Also, some recently-introduced labor market programs have been discontinued, and transfer payments abroad may be cut. Spending on IT infrastructure, and on R&D is set to rise, and overall public investment to remain broadly constant as a percentage of GDP.

The structural balance would reach Austria’s medium-term objective (MTO) of -0.5 percent of GDP in 2019 (and balance in nominal terms), after widening slightly in 2018.1/ By 2022, with the output gap closed, the nominal and structural balance would reach a surplus of 0.4 percent of GDP.

Public debt would, as a result, decline by more than 15 percentage points of GDP over five years, approaching the 60 percent mark established in the Maastricht Treaty. This is a faster debt reduction path than envisaged by the previous government, which anticipated a reduction by about 10 percentage points of GDP over the same time horizon.

1/ The structural balance is -0.1 percent of GDP in 2017 and -0.5 percent in 2018 if spending on refugees and anti-terrorism measures are excluded.

14. The authorities’ medium-term plans are difficult to achieve without deeper structural reforms. Over the medium- to longer-term, significant savings potential exists, especially in the areas of healthcare and subsidies, but a concerted effort of the federal government and states is needed to realize it. This would likely need to include further adjustments in the fiscal relations between the federal and subnational governments. The current federal fiscal framework, which sets revenue sharing and spending parameters through 2022, envisages some steps toward achieving greater spending efficiency in healthcare through benchmarking, cost reduction, and spending reviews (see Country Report 17/26 (2/2/17)). Moreover, in a new initiative, the government intends to reduce the number of insurance bodies. But these measures are only beginning to unfold, and their impact on costs is uncertain. Similarly, the authorities’ plan to cut subsidies is welcome, but without a further reform of fiscal federal relations the effect may be limited.2 Lastly, over the medium term, demography-related spending needs will begin to rise gradually, putting additional pressure on other spending areas, if targeted savings are to be achieved.

Medium-Term Fiscal Policy (% GDP)

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Sources: Statistik Austria, and authorities’ and IMF staff projections.

15. Staff projections are more conservative than the authorities’. This is largely because most of the planned savings—notably improvements in administrative efficiency—are difficult to quantify.3 Also, the envisaged reduction in personnel costs will be difficult to achieve in the short run, especially as additional positions are created in the area of police and internal security. Staff project revenue to remain broadly constant in the medium term, as the impact of planned reductions in VAT on overnight stays is small. Nonetheless, even under the staff’s scenario, the structural balance would decline to -½ percent of GDP by 2020, and the nominal balance would be zero, before widening again in the outer years as demography-related spending picks up gradually. Public debt would continue to decline, to 61 percent of GDP by 2023 (see Annex III).


Long-term fiscal pressures

(% GDP)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Source: IMF staff projections.

16. Time is ripe for implementing efficiency-raising reforms. Rebuilding fiscal buffers and further lowering public debt are key for ensuring long-term fiscal sustainability. Therefore, Austria’s MTO of a structural balance of -0.5 percent of GDP remains appropriate, while a more specific fiscal program would provide greater confidence that it can be achieved. Moreover, structural fiscal reforms that ensure government spending on a sustainable footing as the population ages are important. Overall, the savings potential from such reforms could be in the range of 2½–3 percent of GDP (see Country Report 17/26 (2/2/17)). As indicated above, this likely requires additional reforms in fiscal federal relations, including stronger incentives for cost savings in the health system. Also, further reforms to the pension system could ease future fiscal pressures. Since reforms in these areas would likely need to be implemented over time, the current window of opportunity—as the economy performs strongly and before ageing costs rise significantly—should be used to tackle them.

17. In designing reforms, including a tax reform, equity considerations will need to be taken into account. Austria’s income inequality and its poverty rates are relatively low, an achievement that should be preserved, though trade-offs between equity and incentives need to be carefully weighed. In this regard, the reduction in social security contributions for low-income earners is a step in the right direction (including to help their employment prospects). Further steps to lower the tax wedge on low incomes should follow, which could be financed by higher taxation of environmental pollution and wealth. On the other hand, the increase in the family bonus set for 2019 does not support families with incomes below the threshold at which income taxes are due.

Authorities’ Views

18. The authorities acknowledged the challenge of reducing revenue and the deficit simultaneously but were confident that this was feasible. They emphasized the need to accelerate debt reduction toward the Maastricht target of 60 percent of GDP to rebuild fiscal buffers. They pointed out that, with strong growth in 2017 and 2018, tax and social security contributions were already approaching the 40 percent target. With regard to expenditure savings, they considered that high output growth would automatically lead to a reduction in the expenditure-to-GDP ratio. Combined with the already-announced measures, this would reduce spending sufficiently to limit the need for additional cuts.

B. Reducing Unemployment

19. While employment has increased steadily over the past several years, so has the labor force. Rising labor force participation among women and the elderly, and immigration, have led to an increase in the labor force by 6.2 percent between 2011 and 2017, and a change in its composition: the share of non-Austrian citizens rose from 11.5 to 16.2 percent.4 Though employment increased by 5.1 percent, unemployment rose slightly, from 4.9 percent in 2012 to 5.3 percent in 2018: Q1 (EU harmonized rate).

20. Going forward, labor force growth is projected to slow gradually. The recently arrived (and accepted) refugees are only gradually entering the labor market and new immigration has slowed, though labor force participation of Austrian women and elderly workers is expected to edge up further.5 On the employment side, above-potential growth in the next few years should generate employment growth outpacing that of the labor force, and lower unemployment further.

21. The recent drop in unemployment is welcome, but challenges remain (Annex V). Driving down unemployment sustainably to levels in the years before the GFC requires proactive policies to increase employability, as well as measures to strengthen labor demand.

  • Improving education. Unemployment is highest among those with only compulsory schooling. Strengthening education would help employability and prepare workers for jobs that increasingly demand higher (though not necessarily only academic) skills. In this regard, the recent increase up to the age of 18 of compulsory schooling or training and the training guarantee for people under 25 are positive steps. Austria’s strong and institutionally deep-rooted dual-education apprenticeship system is well-placed to boost skills.

  • Integrating foreigners (including accepted refugees) into the labor market. Foreign-born residents—an increasing share of the labor force—frequently have lower levels of education and training than Austrians, but even at the same level of education, their unemployment rates are higher. Therefore, additional efforts need to be made to address the specific hurdles that non-Austrians face, including acquiring recognized qualifications and language skills.

  • Active labor market policies. Active labor market polices can help target specific segments of the workforce. Elderly workers, whose labor force participation is rising, face increasing unemployment rates and, once unemployed, have significant difficulties in finding a job. In this context, the government’s decision to discontinue targeted support through secondary labor market for over 50-year-old long-term unemployed will likely have adverse effects on this age group. However, costs and benefits of such schemes need to be carefully weighed.

  • Boosting labor demand. Measures along the lines of those previously recommended by staff (see Country Report 17/26 (2/2/17)), including policies to strengthen innovation and competition by lowering barriers to entrepreneurship, a shift in the tax mix away from labor, and higher public investment would raise private investment and productivity, and with them potential output and employment. In some of these areas, planned steps are promising, such as better support for start-ups, more financing for R&D, a strengthening of the education system and its better integration with the economy, and increasing flexibility in working hours.


Unemployment (by highest education)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Authorities’ Views

22. The authorities agreed that tackling unemployment remained a challenge. They concurred with staff that improving the education system was critical to improve employability as well as address labor shortages in higher-skilled segments of the labor market. They pointed out that high unemployment among foreign nationals occurred partially because they were more often employed in seasonal activities (e.g., in the tourism industry or construction), but also acknowledged that lack of skills could play a role. With regard to targeted support for elderly workers, they considered that providing subsidized employment (including in the public sector) would be inefficient and crowd out the regular labor market. They thought that supporting continuous training and education for workers was more effective in reducing unemployment for the elderly.

C. Consolidating Financial Stability

23. Austria’s banking system as a whole is well-capitalized, but additional buffers would be welcome as insurance against large adverse events. The sector-wide capital adequacy ratio stood at 18.2 percent at end-2017, and the CET-1 ratio was 14.6 percent. Large banks have narrowed the gap between their capital levels and those of peers, and have met targets under the authorities’ bank sustainability package introduced in 2012, although some continue to maintain relatively modest buffers above the regulatory minimum requirements.6 The thirteen largest banks are also set to meet the systemic risk capital buffer of up to 2 percent, which is to be fully phased in during 2019. Banks’ dependence on wholesale funding is low, and all Austrian banks also meet the recently fully phased-in liquidity coverage ratio (LCR), with a weighted average of 145 percent at the unconsolidated level.7 Profits have risen further in 2017, largely because of reduced risk provisioning, as nonperforming loans (NPLs) declined (adding to the case for additional capital buffers).8,9 However, cost reduction is progressing only slowly and the low-interest environment continues to put pressure on profits.

24. Risks to banks’ portfolios have been reduced. Domestic household foreign currency loans have declined significantly, to less than 15 percent of total loans as of December 2017, and the share of variable rate loans in new household loans has fallen to a little over half. Moreover, the shift of Bank Austria’s CESEE operations to Unicredit in Italy has significantly reduced the direct exposure of the Austrian banking system to CESEE. Austrian banks’ subsidiaries in CESEE have further strengthened their funding base, with the loan-to-deposit ratio declining to 79 percent, from over 100 percent in 2011. This also implies that Austrian banks’ strategic retrenchment from CESEE countries has not had negative spillovers in the area: with few exceptions, which can be explained by lingering political uncertainties about the treatment of legacy foreign exchange mortgage loans as well as regulatory risks, growth rates of credit issued by them are comparable to—and are in most cases higher than—overall credit growth in these countries.


Credit in CESEE (2017)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: IMF staff calculations

25. Credit extension in Austria has recovered from post-crisis lows. Nominal credit to the private sector grew 3.7 percent (y/y) in February 2018, broadly unchanged from a year earlier, even though the economy accelerated. Both credit to nonfinancial corporations (+5.7 percent) and credit to households (+3.5 percent) have accelerated, but indebtedness remains below peers’ levels.10 Growth in residential real estate loans (+4.8 percent) has remained broadly stable around the growth in house prices.

26. The regulatory and supervisory frameworks have been strengthened. The authorities updated their supervisory guidance in 2017. With improved capitalization, a stable funding base in CESEE subsidiaries, and the development of recovery and resolution plans, the focus has now shifted to strengthening the business models of major internationally active banks. This includes rationalization, cost cutting, and IT investments, as well as further strengthening of capital—where increased profit-sharing pressures have led to some loss in momentum. Also, the legal basis for using targeted real-estate macroprudential tools (loan-to-value caps, debt-service-to-income limits, term restrictions, debt-to-income ceilings and minimum amortization requirements) has been established, and the authorities are collecting additional data to improve their analysis of the real estate market and its interaction with the financial system, including early identification of any household balance sheet strains.11

27. Banks should take advantage of the current benign macroeconomic environment to buttress profitability and safeguard internal capital-generating capacity. This would also underpin business investment and the potential of the economy. While the recent rise in profits is welcome, a significant part of these gains stems from one-off factors (reduced risk provisioning). Large banks need to continue implementing their adjustment plans, and raise further capital to bolster cushions above regulatory limits, including by limiting dividend payouts. As net interest income remains constrained in the low interest rate environment, this involves efforts to reduce structural costs (which may also involve investments in efficiency-enhancing infrastructure), refocusing on core activities, and withdrawing from non-profitable and high-risk activities and locations.12 For smaller banks, reducing costs, including through accelerating the development of digital banking and increasing fee-based activities to offset shrinking interest rate margins, are crucial. Supervisory and regulatory authorities need to ensure that banks further raise capitalization levels, continue to reduce vulnerabilities, and implement their cost-cutting plans.

28. Real estate-related risks to financial stability are contained at present (Annex V). There is currently no need to formally activate the new macroprudential tools, notwithstanding some limited loosening in banks’ lending standards. Furthermore, the associated reporting requirements allowing full evaluation of risks and potential policy effects are expected to become effective only in 2019. That said, the authorities need to remain vigilant and be prepared to take preemptive action to head off stability risks if needed. At the current juncture, consideration should be given to providing clearer guidance to banks on sustainable lending standards, including by quantifying specific loan-to-value, debt-to-income and debt-service-to-income limits.

29. The Single Resolution Board and the FMA are in the process of issuing binding targets for bail-in-able debt (MREL) for most of the banks under their remit and will complete this process in 2019. The case for MREL in excess of minimum capital requirements is weaker for small deposit-taking banks (such as Austria’s local and regional banks) that have traditionally steered clear of debt markets. For such banks—which are mostly under the purview of national regulators—the expectation should be liquidation rather than resolution in case of difficulties, with no recourse to state aid.

30. A stronger Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework will help Austria sustain its position as a financial center. The authorities need to continue strengthening their AML/CFT regime in line with their action plan adopted in response to the 2016 Financial Action Task Force (FATF) Mutual Evaluation Report. Several Action Plan items have already been addressed by legislative measures over the course of the last two years. These improvements were acknowledged by the FATF in the first follow-up report in December 2017. Austria should further enhance the effectiveness of the AML/CFT framework by improving investigation and prosecution of money laundering and the use of financial intelligence. As a next step Austria should implement the 5th EU AML Directive. This will further improve Austria’s AML/CFT with a view to the current AML/CFT risk landscape (anonymity of virtual currencies and the lack of transparency of beneficial ownership and high-risk countries).

Authorities’ Views 13

31. The authorities agreed that banks needed to reinforce their efforts to sustainably raise profitability and continue to improve capitalization. They were confident that banks would be able to make the needed adjustments, but cautioned that costs could initially rise as investments, especially in IT, were needed to increase efficiency, and staff reductions were also costly. They were of the view that a further strengthening of capital buffers in large banks was desirable, in particular in the current high-growth environment.

32. The national supervisory authorities shared staff’s assessment that real estate-related risks were limited at this time, notwithstanding some loosening in lending standards. They thought that the European Systemic Risk Board’s (ESRB) 2016 warning on medium-term residential real estate vulnerabilities did not sufficiently take into account initial conditions but focused only on changes, and also didn’t consider country-specific features of the Austrian housing markets, including a low level of home ownership. They indicated that in some banks mortgage lending practices were riskier than they deemed appropriate and have conducted targeted dialogue with those banks. Also, they pointed out that the mortgage-related data they were currently gathering were only covering part of the sector and that comprehensive monitoring would be possible only from 2019 on.

33. The government emphasized that they were strongly committed to strengthen their AML/CFT framework. They explained that in the 2017 follow-up report of the FATF, several of Austria’s ratings had improved. They had increased supervisory resources, and recently established a register of beneficial ownership. Going forward, the authorities are preparing to implement the European Union’s 5th AML directive, including through improving coordination and information sharing among agencies.

Staff Appraisal

34. The economy is robust, and Austria’s economic foundations are strong. Growth has risen markedly, driven by investment, rising labor supply, and net exports. The public debt-to-GDP ratio has continued to fall, unemployment has declined, and the financial sector has been strengthened. The external position remains broadly in line with fundamentals and desirable policies.

35. The overall outlook is solid, but potential growth remains constrained. In 2018, GDP growth is projected to remain strong at 3 percent as investment growth and public consumption taper off, but private consumption and net exports accelerate. With the output gap turning positive, growth would then gradually slow, before settling at its potential rate of about 1¾ percent. Inflation should run slightly above 2 percent in the medium term. As employment grows faster than the labor force, unemployment would gradually decline.

36. Risks arise largely from external factors, but their impact is likely limited overall. A retreat from cross-border integration, or slow growth in other advanced economies and emerging markets, would lower Austria’s performance, largely through confidence, trade and financial channels. However, the European Single Market provides a stable framework, and declining bank exposure to CESEE is containing vulnerabilities. Domestically, if efforts to integrate immigrants were unsuccessful, this could reduce their contribution to the economy.

37. The short-term fiscal outlook is favorable, but long-term sustainability requires structural reforms. Debt is set to decline further throughout the medium term. The authorities’ planned fiscal consolidation is ambitious and welcome, but the measures needed to achieve it are not fully identified. Priority should be given to structural fiscal reforms that enhance the efficiency of public expenditure and the sustainability of the pension system to create fiscal space to absorb rising spending needs as the population ages. To this end, the current window of opportunity should be used to put in place efficiency-boosting expenditure reforms, in particular in the health sector and in subsidies. To be successful, many of these reforms require adjustments in fiscal relations between the federal and subnational governments. Also, further reforms to the pension system could also ease future fiscal pressures. The potential for savings is significant, and, in combination with growth-raising reforms, would ensure long-term fiscal sustainability.

38. In designing reforms, including a tax reform, equity considerations will need to be taken into account. Austria’s strong welfare state efficiently achieves relatively low levels of income inequality and poverty rates. While trade-offs between equity and incentives need to be carefully weighed, a rebalancing of the tax burden and expenditure cuts need to be designed with a view to preserving Austria’s social achievements.

39. Reducing unemployment durably requires proactive policies. While the strong economy has already led to some decline in unemployment, reducing it durably to pre-GFC levels requires additional measures. These include (i) improving education outcomes; (ii) special efforts to supporting the integration of foreigners into the labor market; (iii) targeted active labor market policies where needed; and (iv) structural measures to raise labor demand (and potential growth), shifting the tax mix away from labor, and raising public investment, as previously recommended by staff. Several initiatives by the authorities, including lengthening the duration of compulsory schooling and training guarantees are steps in the right direction.

40. Consolidating financial stability requires that banks continue to implement adjustment plans to cut costs and raise further capital. While large banks’ capitalization has improved in recent years, creating further buffers to prepare for a less benign environment is important. To ensure sustainable profitability and capital-generating capacity, banks now need to focus on strengthening their business models, largely through rationalization, cost cutting, and IT investments. Also, dividend payouts should be consistent with adequate earnings retention. The regulatory and supervisory authorities need to ensure that banks implement measures to these ends. Financial stability risks from the real estate markets remain limited but warrant continued close monitoring. While use of formal macroprudential instruments does not appear necessary at this time, the authorities should not shy away from targeted proactive steps—which could include quantified supervisory guidance—to maintain sustainable lending standards. To preserve Austria’s position as a financial center, the authorities will also need to continue bolstering the AML/CFT framework, notably by improving the investigation and prosecution of money laundering and the use of financial intelligence and implement the recently-issued 5th EU AML Directive.

41. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Figure 1.
Figure 1.

Austria: Real Sector Developments

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: Haver; Oesterreichische Nationalbank (OeNB); and IMF staff estimates.
Figure 2.
Figure 2.

Austria: External and Fiscal Developments

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: Haver; OeNB; IMF, Direction of Trade database; and IMF staff estimates.1/ Excluding Germany and CESEE euro area countries.
Figure 3.
Figure 3.

Austria: Credit and Housing

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: Haver; OeNB; and IMF staff estimates.1/ Up to one-year fixed rate for new loans over 1 million euros to non-financial corporations.
Figure 4.
Figure 4.

Austria: Banking Sector

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: Bloomberg; SNL; Haver; IMF, Financial Soundness Indicators; and IMF staff estimates.1/ 2017 data used when available; otherwise 2016.2/ Italy, Hungary, Spain, Belgium, Germany, Sweden and France.
Figure 5.
Figure 5.

Austria: Financial Markets

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: Bloomberg; DataInsight; and IMF staff estimates.
Table 1.

Austria: Main Economic Indicators, 2015–23

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Sources: Authorities’ data and IMF staff estimates and projections.
Table 2.

Austria: Fiscal Accounts, 2015–23

(In percent of GDP, unless otherwise indicated)

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Sources: Authorities’ data and IMF staff estimates and projections.

One-off measures as defined in the Austrian Stability Program.

Table 3.

Austria: Balance of Payments, 2015–23

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Sources: Authorities’ data and IMF staff estimates and projections.
Table 4.

Austria: Financial Soundness Indicators, 2013–17

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Sources: Authorities, and IMF staff estimates and projections.

Domestically controlled, cross-border and cross sector consolidation basis.

Domestic consolidation basis.

From 2014, NPLs are reported on a borrower instead of single loan basis.

Includes loans to financial institutions.

Exludes shares and other equity.

Annex I. External Sector Assessment

Austria’s external position remains broadly in line with fundamentals and desirable policies. The current account gap is near zero, while the REER is modestly overvalued.

External position. Austria’s external position has strengthened considerably in recent years, with the international investment position (IIP) moving from -21 percent of GDP in 2001 to a moderate 6 percent in 2017, as the current account moved into surplus in 2002. This shift took place as goods exports rose faster than imports as Austria became more closely integrated into European value chains after entry into the EU in 1995. This moved trade in goods closer to balance. At the same time, trade in services, in which Austria has traditionally a surplus (based largely on tourism) became more important in overall trade. Going forward, the current account is expected to remain broadly unchanged. Regarding financial flows, Austrian banks sharply reduced their reliance on foreign wholesale financing (and exposure to CESEEs), with the decline in foreign liabilities exceeding the decline in assets as deposits rebounded both at home and in CESEEs. This has led to a decline in banks’ gross external assets from a peak of over 100 percent of GDP in 2008 to about 62 percent of GDP in 2017. The transfer of Bank Austria’s CESEE operations to Unicredit, its Italian parent, has further contributed to the reduction of the banking system’s asset and liability position in the order of 30 percent of GDP.


External Trade

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

External Balance Assessment

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Sources: Authorities’ data

Considers the REER CPI index in each country, and thus does not explain inter-country variations.

Takes into account differences in real PPP exchange rates across countries.

Current account balance and real exchange rate. The external balance is assessed to be broadly consistent with medium-term fundamentals and desirable policies. Using the External Balance Assessment estimates, the current account balance in 2017 (2 percent of GDP, cyclically adjusted) was close to the norm (estimated at 1.8 percent of GDP).1 The policy gap arises from a low budget deficit relative to trading partners—partly counterbalanced by high health expenditure relative to trading partners—and relatively weak credit as a percentage of GDP. However, with the overall gap close to zero, the policy gap is counterbalanced by an unexplained residual. Model-based estimates suggest that the REER was modestly overvalued (around 7½–10¼ percent). However, these estimates do not take into account the cyclical position and the unexplained residual is large, accounting for close to two-thirds of the estimated overvaluation. Therefore, using the current account gap as reference and an estimated semi-elasticity of 0.07 yields an indicative REER gap of -1.2 percent which is assessed as broadly consistent with fundamentals.

Capital and financial account. Net direct investment outflows to both CESEE countries and the EU-15, have recovered quickly after the GFC driven by real-sector investment, keeping the FDI position generally in surplus.2 Net portfolio investment outflows have been strong as well and are expected to remain so, despite the further retrenching of Austrian banks’ foreign holdings, and the negative net portfolio investment position is expected to narrow gradually. This will be mirrored by a decline in the net “other investments” position.

Overall assessment. Austria’s external position is sustainable and broadly in line with fundamentals. The ageing population implies that a build-up of external assets in the next few years is warranted as a buffer for future withdrawals. Policies are broadly appropriate, though raising the efficiency of health expenditures and reforming pensions would open significant savings potential to help ensure fiscal sustainability in the long run.

Annex II. Risk Assessment Matrix1

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Annex III. Debt Sustainability Analysis

Austria’s debt outlook has improved further. Public debt is sustainable within the medium-term projection horizon, though ageing cost pressures are looming in the longer term. Under the baseline, debt will fall from around 84 percent of GDP at end-2016 to 61 percent of GDP by end-2023. Standardized stress tests indicate that lower growth and a combined macro-fiscal shock could shift the debt-to-GDP ratio upwards, but debt would remain on a downward trajectory. However, in the longer term (starting in the mid-2020s), ageing cost pressures and higher interest rates would reverse the debt path without additional policy measures.


Under the baseline, fiscal policy is set to return the structural deficit to ½ percent of GDP, Austria’s MTO, by 2020.1 This, as well as the positive effects of the deal with the creditors of HETA, the wind-down unit of the former Hypo Alpe Adria bank, would bring gross public debt to 61 percent of GDP by 2023, almost 18 percentage points down from its 2017 level.2 Gross financing needs are moderate in the period 2018–23.

The heat map indicates that vulnerabilities remain limited. The declining debt level implies that the impact of potential shocks would not push Austria’s debt up—except for a contingent liability shock—over the relevant thresholds. The high share of public debt held by non-residents, and the attendant external financing requirements, are a potential vulnerability, though this is limited by the perception of Austria as a safe haven. However, it could lead to higher volatility in spreads, especially once the European Central Bank’s (ECB) asset purchases end, depending on interest rate dynamics outside Austria and residual risks from commercial banks’ CESEE exposure.

Stress Tests

The low-growth scenario assumes that growth is slower by one standard deviation of the historical outturn, implying a reduction by close to 2½ percentage points in 2019–20. However, the debt-to-GDP ratio would increase only marginally and then decline to 68 percent of GDP by 2023. A contingent liability shock of 10 percentage points of GDP would raise public debt to 88 percent of GDP, which would only slowly decline to 81 percent of GDP by 2023. The other standardized macro shocks—the primary balance shock, the real exchange rate shock, and the real interest rate shock—will not lead to significant deviations from the baseline debt path. A combined shock for all variables is driven by assumed lower growth and leads to a similar debt path as in the low-growth scenario.

Figure 1.
Figure 1.

Austria: Public Sector Debt Sustainability Analysis (DSA) – Risk Assessment

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt 30 and 45 percent for the public debt held by non-residents.4/ Long-term bond spread over German bonds, an average over the last 3 months, 29-Mar-18 through 27-Jun-18.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure 2.
Figure 2.

Austria: Public DSA – Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Source : IMF Staff.1/ Plotted distribution includes all countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Data cover annual obervationsfrom 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Figure 3.
Figure 3.

Austria: Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Source: IMF staff.1/ Public sector is defined as general government2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r -π(1 +g) – g + ae(1 +r)]/(1 +g+π+gπ)) times previous period debt ratio, with r = interest rate;π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π(1 +g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 4.
Figure 4.

Austria: Public DSA – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Source: IMF staff.
Figure 5.
Figure 5.

Austria: Public DSA – Stress Tests

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Source: IMF staff.

Annex IV. Authorities’ Response to Past IMF Policy Advice

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Annex V. Unemployment and Housing Market Developments


1. Unemployment has recently declined but remains relatively high by Austrian standards. While the impact of the GFC has been less severe than elsewhere in Europe, unemployment remains above pre-GFC levels, and well above the low of 2008. With the output gap nearly closed, the question arises how much further unemployment can fall sustainably.


Unemployment in Austria

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

2. A permanent—or at least long-lasting—increase in equilibrium unemployment could occur for a number of reasons: (i) a reduction in demand for labor due to lower potential growth or rising unit labor costs; (ii) a reduction in supply of labor but not the labor force because of a higher reservation wage; or (iii) mismatches between demand and supply, e.g., due to skills mismatches or geographical mismatches.

  • Demand for labor is in line with previous upswings. Unit labor costs have risen relative to peers, implying that competitiveness has been eroded. However, the current account remains positive, and export growth has been solid, suggesting that Austria’s level of competitiveness remains solid. Also, the economy is generating vacancies at a similar pace as in previous upswings.

  • Supply of labor is rising (though hours worked are not), as labor force participation has continued to increase, and immigration continues. Participation rates of women and elderly workers have increased strongly, the latter likely due to tightened rules regarding early retirement, as well as pension reforms that require a higher number of contribution years before a full pension can be drawn. The increase in female labor force participation follows a general trend across European countries and is particularly strong in the age group of 50 to 64 years, representing a catch-up with other European countries. Immigration has also been strong, leading to an expansion of the labor force even as the native working-age population shrinks. Labor force participation has increased also among those with low education even as work has become relatively less worthwhile for them: earnings of workers in the first income quartile have declined significantly relative to unemployment benefits for those with the lowest levels of education, especially for men.1


Output and Vacancies (2005–18)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001


Labor Supply

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

3. Mismatches have increased nonetheless, although the labor market appears to operate well overall. They arise in mainly in skills/education and nationality.

  • Skills. Demand for highly skilled workers is rising much faster than for those with lower skills. At the same time, the mismatch for highly skilled workers (with a university or post-secondary college degree) has remained broadly unchanged since 2007/08, but at a higher level than for other workers. This suggests that the education system is keeping up with the needs of the labor market. However, with an increasing share of highly-skilled workers in both the workforce and in vacancies, this specialization nonetheless implies that the economy-wide skills mismatch has increased relative to where it would have been without the shift to demand and supply for higher skills. At the other end of the education spectrum, both demand and supply of low-skilled workers have declined significantly, but unemployment has risen. While the mismatch has recently fallen back to pre-GFC levels, it appears that there are still too many workers with only compulsory school education.

  • Nationality. With the removal of mobility restrictions on citizens of the EU’s New Member States (NMS) in 2011, their number has increased significantly. In addition, geographic proximity (especially for Vienna, the economic hub) makes it also easy for daily or weekly commuters to work in Austria while residing in neighboring countries. At the same time, foreign nationals are much more likely to be unemployed than Austrians. Independent of the level of education, foreign nationals, in particular those from outside the EU, face a higher risk of unemployment than Austrian nationals. To some extent, this is natural: there are language barriers, there may be skills gaps (even if the formal level of education is the same), foreign nationals may have fewer informal connections. Nonetheless, even over time, the difference does not decline significantly—on the contrary, second-generation foreign nationals have the highest unemployment rate—which suggests that in some segments of the population, poverty and unemployment may have become entrenched.

  • Vienna. Labor market mismatches arising from education and/or nationality background can explain some of Vienna’s unemployment, which is significantly higher than elsewhere in Austria—unusual compared to other European countries. But unemployment rates in Vienna are higher across all educational levels and nationalities.


Labor Market Mismatch (2004–18)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

1/ Includes immediately and not immediately available vacancies.

Unemployment (2017)

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: Statistik Austria and IMF staff calculations.

Regional Unemployment (2017) 1/

Citation: IMF Staff Country Reports 2018, 272; 10.5089/9781484375846.002.A001

Sources: Eurostat.

The Housing Market

4. The Austrian housing market has shown a strong trend rise in valuations over the last decade, mainly driven by price increases in Vienna. Prices stagnated through the mid-2000s but have since outpaced most of Austria’s EU peers. In September 2016, the ESRB issued Austria a warning on medium-term residential real estate vulnerabilities because of the robust price and credit growth and the risk of further loosening in credit standards.2 Recently, price growth moderated to 4.7 percent (y/y) at end-2017, due to a slowdown in Vienna, though prices accelerated in the rest of the country.