Latest economic developments

The economic outlook could turn out to be more optimistic than forecast by the IMF. Latest data, which have become available since after the IMF mission, point towards a strong recovery of the Austrian economy. Q2 came in stronger than expected with a quarter-on-quarter growth rate of 4.3 percent. The weekly indicators of the Österreichische Nationalbank (OeNB) and the Austrian Economic Research Institute (WIFO) indicate that the pre-crisis output level might already be reached in Q3 2021 for the first time since the beginning of the crisis. This would imply another strong quarter-on-quarter growth rate of around 3 percent in Q3. Overall, GDP growth in 2021 could reach 4 to 4.5 percent in 2021, and the carry over for 2022 will be substantial. Thus, also the GDP level could be closer to the pre-COVID trend in the medium term than currently assumed by the IMF staff (-0.5 percent instead of -1.6 percent in 2026). Risks to growth are mainly on the upside in the short run, while downside risks around the pandemic still dominate in the medium term.

The latest data on inflation have also surprised on the upside. Cost pressures emanating from rising raw material prices and supply shortages seem to be somewhat more persistent than previously assumed. Surveys indicate that recently producers were able to pass on higher production costs to consumers. While the OeNB still expects that the increase is mainly due to temporary factors, some upside risks have materialized and inflation might reach 2 ½ percent in 2021 and could remain above 2 percent in 2022, almost 0.5 percentage points higher in both years than expected by IMF staff. The risks to the inflation forecast also remain on the upside, especially as higher inflation rates may lead to higher wage settlements.

Economic Policy

Austria’s response to the economic fallout from the pandemic crisis was swift and comprehensive, with a package of income and liquidity support to households and firms in the amount of 13 percent of GDP. Fiscal support was among the most generous in the EU, taking account of the high sectoral exposure of the Austrian economy via the tourism, arts and entertainment sectors, and benefitting from responsible budgetary policies in the past.

Despite the massive fiscal support, containment measures, health-conscious consumption behaviour and high uncertainty resulted in a 6.3 percent drop in GDP in 2020 and still negative growth in Q1 2021. Economic activity has picked up in Q2 2021, as a significant drop in new COVID-19 cases allowed the reopening of the service sector, while the vaccination roll-out reduced individual and joint health risks, thus stimulating consumption.

The decisive factor for the recovery going forward will be the development of consumption/savings. Helped by automatic stabilizers, Austrian consumers proved to be relatively resilient to the economic cycle in the past, stabilizing aggregate demand during crises. However, the pandemic crisis is different, consumers became very cautious and the savings rate doubled. Investment held up relatively better, as government measures encouraged firms to bring forward capital formation. The main challenge for Austria is to turn around the pandemic’s impact on consumption, while allowing the reallocation of resources from sectors that may no longer be viable. The overarching objective is to raise confidence, and next to effectively fighting the health crisis, a prudent fiscal policy strategy going forward appears a key component. This is all the more important as the budgetary impact of an ageing population will start to kick in from the mid-2020s. The authorities believe that further stimulus to the economy would not be very effective in raising GDP in the near term. The construction sector is already operating at potential, manufacturing production has surpassed the pre-crisis level, labor shortages are becoming a constraint in certain sectors, with just three unemployed per reported vacancy, and scarcity of certain raw materials has raised input prices.

With regard to the IMF’s views that more is needed to support firm solvency, we would like to point out that the Austrian Recovery and Resilience Plan (ARP) includes measures to strengthen the equity position of Austrian companies, e.g. via converting government-guaranteed loans into equity or equity-like instruments and by anchoring collective investment schemes into the company law, along established models in other EU countries. In addition, the Green Finance Agenda aims at mobilising private investment for green projects by providing services to improve bankability. The ARP also includes measures to address skill mismatches in the labour market, focussing in particular on digital skills.

Fiscal Policy

In the last months the authorities were committed to address and mitigate the effects of the COVID-19 pandemic on the Austrian population, the labor market and the corporate sector. The crisis response and the pronounced economic downturn left deep scars in public finances. A swift economic recovery will help to stabilize public finances. Compared to 2020, the government balance will improve in 2021–while expenditure for crisis management and economic stimulus measures remains high, the first half of 2021 showed a strong rebound of tax revenue.

The authorities agree with staff that the policy mix should shift from targeted crisis management to support a sustainable economic recovery. The relief measures are phased out in line with the economic cycle, while continuing support to sectors that are still affected. Moreover, policies shift to support the green and digital transition. The ARP sets new priorities and complements already existing national budgetary programs. The government is now turning its efforts towards large reform projects such as the greening of the tax system, measures to reduce the labour tax wedge, strengthening equity capital and a reform of long-term care. The authorities are also firmly committed to return to a sustainable budget policy to have flexibility to respond to shocks and create fiscal space to meet long-term spending pressures from population aging.

Financial Sector

Despite the challenging environment in 2020, the Austrian banking sector kept supporting the real economy. The buildup of macroprudential capital buffers in recent years and regulatory guidance on retaining earnings caused banks’ capital ratios to increase, which enables banks to assist the economy also in its upswing. In tandem with public support measures and supported by the Eurosystem’s monetary policy measures, this strengthened the stability of the financial system and improved market participants’ and rating agencies’ confidence in the Austrian financial sector even during the pandemic. In 2020, banks increased risk provisioning early on to prepare for a pandemic-induced rise in credit risk. These precautionary measures, however, significantly weighed on the sector’s profit last year.

Even though some support measures have already expired, credit quality at Austrian banks has not yet deteriorated. The historically low interest rates and pandemic-related changes in housing demand have buoyed both credit and price growth in the residential real estate segment, while variable interest rate loans still account for a significant share of new loans. The current lending standards for housing loans are increasingly exceeding the threshold criteria for sustainable residential real estate lending defined by the Austrian Financial Market Stability Board (FMSB).