Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Austria

June 19, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Austria is also available.

Public Information Notice (PIN) No. 08/72
June 19, 2008

On June 13, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Austria.1


Solid economic policies, wage moderation, and an early focus on Central, Eastern, and South Eastern Europe (CESE) explain Austria's strong economic performance in the past period. Economic policies have contributed to this performance by focusing on macroeconomic stability and structural reforms. Wage moderation, resulting from a strong social partnership, has preserved competitiveness and supported export led growth, which has significantly exceeded the euro area average in the past period.

In line with developments in major trading partners, a slowdown is expected for 2008-09. The economy grew strongly in 2006-07: real GDP increased by more than 3 percent in both years, driven by robust exports and investment. Looking ahead, the growth momentum is expected to soften in the course of the year as activity in trading partners dampens and growth is projected to slow to around 2 percent in 2008-09.

Austria's external position remains strong, despite a recent decline in competitiveness. The current account turned positive in 2002 and has remained strong on account of strong exports of goods and non-factor services. This reflects a period of wage moderation combined with robust productivity growth, resulting in strengthened competitiveness. In the last year, the Unit Labor Cost (ULC) based Real Effective Exchange Rate (REER) has started to edge up again, but it still compares favorably with the euro area.

Inflation has increased, but there is so far little indication of a wage-price spiral. As elsewhere in Europe, headline inflation in Austria went up due to sharp increases in energy and food prices, while core inflation has been contained. Recent wage agreements between social partners for 2008 are higher than in recent years, but are still moderate.

The general government fiscal deficit narrowed significantly in 2007 and the public debt ratio came down below the Maastricht reference value of 60 percent of GDP. However, the structural deficit is still estimated at around 1 percent and over the last few years there has been limited structural improvement.

The Austrian financial system is generally robust. Soundness indicators for banks and other financial institutions are at satisfactory levels, and 2007 seems to have been a good year for the industry. The recent global financial market turmoil has not had a major short-term impact on Austrian banks, but has increased funding costs. Banks' direct exposures to affected asset classes and off-balance sheet risks seem to be modest. Were funding costs and risk premia to remain elevated, expansion of credit in CESE would be dampened.

Executive Board Assessment

Executive Directors commended Austria's continued strong economic performance, which has been driven by robust exports and investment. Economic growth is significantly above the euro area average, employment growth has accelerated and unemployment remains lower than in the euro area, and the public debt to GDP ratio has declined. The strong performance reflects sound economic policies, wage moderation, and a significant engagement in Central, Eastern, and Southeastern European economies. Directors considered that the main challenges facing the Austrian authorities are to maintain external competitiveness, ensure fiscal sustainability, and continue strengthening financial regulation and supervision.

Directors noted that inflation has increased sharply because of higher energy and food prices, although so far there is little indication of second-round effects. Wages have been increasing moderately, despite higher labor demand, and unit labor costs have been contained. Nevertheless, Directors stressed that, with inflation risks tilted to the upside, continued wage moderation and structural reforms will be essential to maintaining Austria's competitiveness and relatively low unemployment.

Directors noted that there has been limited consolidation of the structural budget balance in recent years despite strong economic growth. Directors supported the government's objective of achieving a structurally balanced budget by 2010, but cautioned that current policies, including a substantial tax cut announced for 2010, are unlikely to deliver this outcome. Given the planned reduction in the tax burden, Directors called on the authorities to identify concrete expenditure-based measures that will be implemented to achieve the fiscal objective. They pointed to healthcare, pensions, and fiscal federalism as key areas of spending restraint and potential efficiency gains.

Directors encouraged the authorities to intensify efforts to reform fiscal federal relations. While recognizing the political difficulties, Directors emphasized that such reform should be given high priority as it is key to achieving major and lasting expenditure savings and efficiency gains. Directors welcomed the planned introduction of a medium-term budgetary framework with fixed expenditure ceilings later this year.

Directors welcomed the Financial Sector Assessment Program update's finding that the Austrian financial system is profitable, well-capitalized and liquid, and resilient to shocks. They noted that the recent global financial market turmoil has not had a major impact on Austrian banks. While the financial system's rapid expansion into Central, Eastern, and Southeastern Europe has brought higher profits and diversification, Directors noted it also has increased risks. In particular, Directors pointed out that rapid credit growth and the significant volume of foreign currency denominated lending represent risk factors that deserve special attention by supervisors and banks' risk managers.

Directors noted that financial sector oversight has become more demanding, a key challenge being to ensure adequate risk management in the context of growing cross-border financial integration and increasing complexity of financial operations. They called for strengthening of cross-border supervisory arrangements and on- and off-site supervision. They noted the recent amendment of Austria's bank supervisory framework, which resulted in an enhanced role for the Austrian National Bank, and emphasized that the new framework will require close cooperation between the National Bank and the Financial Market Authority. Directors considered that the effectiveness of supervision would be enhanced through better legal protection for supervisory action.

Directors welcomed recent structural reforms in product and labor markets, including the relaxation of regulations on working and shop opening hours. They encouraged the authorities to focus on further measures that support competition, including compliance with the EU directive on services liberalization. They recommended that pension reforms be implemented firmly to enhance long-run fiscal sustainability and encourage labor market participation and flexibility.

Directors commended Austria for increasing its official development assistance to 0.5 percent of GNP in 2007, and encouraged the authorities to continue to move toward the UN target of 0.7 percent of GNP.

Austria: Selected Economic Indicators
  2004 2005 2006 2007 2008

Real economy


Real GDP (change in percent)

2.3 2.0 3.3 3.4 2.1

Domestic demand (change in percent)

1.6 1.3 2.4 2.8 1.8

CPI (period average, percent change)

2.0 2.1 1.7 2.2 2.9

Unemployment rate (in percent)

4.8 5.2 4.7 4.4 4.3

Gross national saving (percent of GDP)

23.4 22.7 23.3 24.5 24.7

Gross domestic investment (percent of GDP)

21.4 20.7 20.9 21.3 21.3

Public finance (in percent of GDP)


Central government balance

-4.1 -1.9 -1.7 -0.8 -0.9

General government balance

-3.9 -1.6 -1.6 -0.7 -0.7

General government balance (EDP)1

-3.7 -1.5 -1.5 -0.5 -0.6

General government debt

63.8 63.5 61.8 59.1 57.8

Interest rates (in percent)2


Three-month interbank rate

2.1 2.2 3.1 4.3 4.8

10-year government bond

4.1 3.3 3.8 4.3 4.3

Balance of payments (percent of GDP)


Trade balance including services

3.0 3.2 4.1 5.0 5.1

Current account balance

2.1 2.0 2.4 3.2 3.4

Fund position (as of April 30, 2008)


Holdings of currency (percent of quota)


Holdings of SDRs (percent of allocation)


Quota (millions of SDRs)


Exchange rates


Exchange rate regime

EMU Member

Euro per U.S. dollar2

0.80 0.80 0.80 0.73 0.63

Nominal effective rate (2000=100)

105.5 105.3 105.5 108.0 ...

Real effective rate (1990=100)3

106.0 108.4 106.1 106.7 ...

Sources: Austrian National Bank; Statistics Austria; Ministry of Finance; IMF staff projections.
1Maastricht Excessive Deficit Procedure (EDP); includes revenues from swaps.
22008 numbers are for April.
3Based on relative normalized unit labor cost in manufacturing.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the Executive Board discussion based on the staff report.


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