Press Information Notice: IMF Concludes Article IV Consultation with Austria

June 20, 1997

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

The IMF Executive Board on June 13 concluded the 1997 Article IV consultation1 with Austria.


After a long period of above-average economic growth, the Austrian economy slowed in the 1990s. A firm peg to the deutsche mark and close consultation among government, labor, and employers were the pillars of a system that generally managed to cushion cyclical downturns through flexible adjustment in aggregate real wages. At the same time, some features of Austria's wage bargaining system impeded wage differentiation at the sectoral and enterprise levels, increased incentives toward labor saving investment, and caused unemployment (while remaining low by European standards) to trend upward from cycle to cycle.

The recovery from the 1992-93 recession was short-lived, and output growth began to falter in the second half of 1995. Domestic demand weakened, as a protracted construction boom ended and falling consumer confidence slowed private consumption. Currency appreciation and the onset of a downturn in Western Europe sharply curtailed external demand, leaving business investment and government spending as the main expansionary forces. A rapidly widening fiscal deficit and continuing wage drift put additional pressure on the external current account.

Against this background and with first-round participation in European Economic and Monetary Union (EMU) the authorities' top economic priority, the government that assumed office in early 1996 agreed with the social partners and the lower levels of government on a two-year consolidation package aimed at reducing the overall fiscal deficit by some five percentage points of GDP by 1997. In an unprecedented move, twin federal budgets for 1996 and 1997 were approved and, later in the year, the lower levels of government agreed to strengthen their fiscal performance.

The progressive withdrawal of fiscal stimulus and sluggish activity in major trading partner countries constrained economic growth to 1 percent in 1996. Private consumption grew by 1 1/2 percent and export growth gained strength in response to the normalization in the exchange rates of some of Austria's trading partners and recovering activity abroad. Higher exports and improving profitability encouraged investment in plant and equipment. However, as the latter mainly served to boost labor productivity, and government began to cut civil service jobs, employment declined and the unemployment rate edged up. Consumer price increases abated to below 2 percent. Wage increases declined even more rapidly: civil service pay was strictly controlled and private sector wage agreements moderated.

The general government deficit contracted by almost 1 1/2 percentage points to 3.9 percent of GDP in 1996 and is projected to decline to below the Maastricht threshold in 1997. Most of the adjustment in 1996 was made at the federal level, and a new revenue-sharing arrangement allowed the lower levels of government to return to their customary small surplus. Although gross public debt increased to 70 percent of GDP in 1996, it is projected to decline in 1997.

The schilling has remained firmly pegged to the deutsche mark; since mid-1995 it has depreciated in both nominal and real effective terms. The reversal of the upward movement of the real effective exchange rate of the schilling that had taken place in 1995 strengthened the profitability of the tradables sector. With the restoration of control over the public finances in early 1996, long-term interest rate differentials vis-à-vis Germany narrowed, signaling a resurgence of market confidence in Austria's first-round participation in EMU. Interest rates trended down during the year as the Austrian National Bank followed the Bundesbank's lead in reducing policy-based rates.

The outlook for 1997 and beyond is for further recovery of growth, but initially at a rate below that projected for the European Union (EU) as a whole. The expansion will initially be narrowly based on exports and investment, with consumption remaining subdued due to continued fiscal consolidation and stagnating disposable income. Wage moderation and the persistence of output gaps will keep inflation low, but unemployment is expected to decline only after 1997.

Executive Board Assessment

Executive Directors commended the authorities for maintaining financial stability and implementing a bold fiscal adjustment effort. They agreed that continued fiscal consolidation and structural reforms were needed to bolster confidence, improve efficiency, and create the conditions for sustainable growth and job creation.

Directors commended the authorities for the successful implementation of their large two-year fiscal consolidation program, which had put Austria back on course for first-round participation in EMU. The improved fiscal performance in 1996 had added to the credibility of the government's unequivocal commitment to this objective. Directors noted the importance of firm adherence to the well-publicized federal deficit target for 1997, and cautioned that the improved performance at the lower levels of government should not be seen as a reason for allowing slippages at the federal level. Corrective fiscal measures to keep the federal deficit on target should be of a durable nature, and Directors noted that, even if the targeted federal deficit was achieved, asset sales and the move of largely self-financing entities off budget would be necessary to reduce the debt ratio.

Directors observed that further fiscal consolidation was needed beyond 1997 to reduce the debt ratio. Notwithstanding the Maastricht deadline, and given the demographic pressure on the pension and health care systems, consolidation should be pursued in its own right to regain room for countercyclical fiscal policy and reduce the size of government. Directors generally viewed structural balance as a desirable medium-term objective, to be pursued through durable expenditure reduction in such areas as civil service employment, subsidies, and social transfers. They called on the government to adopt a more ambitious approach in the discussions on the budgets for 1998 and 1999 in line with that objective. In addition, Directors emphasized that reforms of the pension and health care systems were urgently needed. They welcomed the recent announcement that the authorities plan to move ahead with a major pension reform, commending that as a courageous decision. Directors observed that it was essential to find a durable and fair solution to the fiscal consequences of demographics as soon as possible.

Directors underscored the importance of flexible labor and product markets to cope with future shocks and to enhance Austria's growth prospects. Particularly important were measures to provide additional flexibility in setting work hours and conditions, to ease layoff restrictions, and to enhance incentives for flexible enterprise-specific arrangements. They welcomed recent measures to that effect and urged the authorities to step up their efforts to deregulate the economy and privatize state-owned companies. More progress was needed in preparing the financial system for competition from within the EU, including through privatization of the major state-owned banks.

Directors supported the long-standing exchange rate peg, which had created high degrees of financial stability and economic integration with neighboring countries. They also welcomed the recent easing of monetary conditions.

The authorities were encouraged to reverse the decline in official development assistance.

Austria: Selected Economic Indicators

  1993 1994 1995 19961 19972

Real Economy (change in percent)
   Real GDP 0.4 3.0 1.8 1.0 1.7
   Domestic demand 0.7 4.5 2.8 1.2 1.1
   CPI (year average) 3.7 3.0 2.2 1.9 1.9
   Unemployment rate (in percent)
        Registered3 6.8 6.5 6.6 7.0 7.2
        Standardized4 ... ... 3.8 4.1 4.2
   Gross national saving (percent of GDP) 24.3 25.4 24.9 25.0 25.4
   Gross national investment (percent of GDP) 24.7 26.3 26.9 26.7 27.0
Public Finance (percent of GDP)
   Central government balance -4.7 -4.8 -4.9 -4.0 -2.7
   General government balance -4.2 -4.8 -5.3 -3.9 -2.5
   Public debt 62.8 65.1 69.3 70.0 68.0
Money and Credit (end of year, percent change)
   Domestic credit 4.9 6.7 6.0 4.6 ...
   M35 3.9 5.4 4.8 1.8 1.5
Interest Rates (percent)
   Three-month money rate6 7.0 5.1 4.6 3.4 3.4
   Government bond yield6 6.2 6.7 6.7 5.8 5.9
Balance of Payments
   Trade balance (percent of GDP)7 -4.6 -5.1 -4.9 -5.0 -4.7
   Current account (percent of GDP) -0.4 -0.9 -2.0 -1.8 -1.6
   Gross official reserves (billions of U.S. dollars)8,9 17.5 19.9 23.6 24.6 22.4
   Reserve cover (months of imports of GNFS) 2.9 2.8 2.8 3.1 ...
Exchange Rates
   Exchange rate regime Member of ERM
   Present rate (June 16, 1997)
S 12.2 per US$1
   Nominal effective exchange rate (1990 = 100)6 104.0 103.9 106.9 105.2 103.7
   Real effective exchange rate (1990 = 100)5,10 103.6 104.3 107.9 105.1 102.9

2Staff projections.
3Registered unemployment in percent of the dependent labor force.
4Survey based and including total labor force according to EU standards.
5For 1997, monthly average of March.
6For 1997, monthly average of May.
7Based on payments data.
8End of period.
9For 1997, end of April.
10Based on consumer prices.

1Under Article IV of the IMF's Article 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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