Public Information Notice: IMF Concludes Article IV Consultation with Austria

June 21, 1999

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.

On June 9, 1999, the Executive Board concluded the Article IV consultation with Austria.1


Economic performance in 1998 was very strong: real growth exceeded 3¼ percent and inflation fell below 1 percent, putting Austria ahead of the EU average in terms of both indicators. Although domestic demand replaced exports as the main engine of growth, the external current account deficit narrowed, assisted by strong competitiveness and an improving tourism balance. Although buoyant employment growth did not reduce the headline registered unemployment rate, the standardized unemployment rate remains low by EU standards.

Despite the slowdown in several export markets, the domestic conditions for continued expansion are good. Austria’s cost-competitiveness vis-à-vis its trading partners has improved markedly since 1995 as a result of wage moderation and rapid productivity growth. In a European context, Austria has relatively flexible labor markets, cooperative social partners, social peace, and a close location to the Central and Eastern European countries in transition, making it highly attractive for foreign direct investment.

The near-term prospects are for growth to resume in the second half of this year, ensuring an annual growth rate of 2 percent of GDP in 1999, slightly above the EU-average, and of around 2½ percent in 2000. Despite the likely return of headline inflation to above 1 percent as a result of the recent reversal of oil price declines, inflation pressures should remain limited as the reduction of the unemployment rate is expected to be moderate and price increases will be contained by further market liberalization.

After two years of reduction in the general government deficit—amounting to some 3¼ percentage points of GDP—the deficit widened again last year. Notwithstanding higher economic growth and lower interest rates, the general government deficit increased from 1.9 percent of GDP in 1997 to 2.1 percent of GDP in 1998. The increased deficit reflected mostly the failure to replace one-off fiscal measures introduced in the 1996-97 consolidation package and the delayed execution of local investment projects. Thanks to privatization proceeds and improved debt dynamics (higher economic growth and lower interest rates) the public debt ratio declined to 63 percent of GDP in 1998.

Incremental structural reform has been pursued in both labor and product markets. In close cooperation with the social partners, labor market flexibility has been improved by tightening the eligibility for early retirement and unemployment benefits; relaxing restrictions on working hours; and introducing performance-based pay options in collective agreements. In the context of the National Employment Action Plan, increased efforts have been made in the area of active labor market policies (e.g., job conversion courses and other types of training). In product markets, increased competition has been introduced in the telecommunications and electricity sectors, resulting in a lowering of industrial input costs.

Executive Board Assessment

Executive Directors commended the authorities on Austria’s remarkable inflation, growth, and labor market performance in recent years, with one of the lowest unemployment rates among European Union countries. They noted that these positive developments owed much to the successful implementation of the 1996–97 fiscal consolidation package and the cumulative and mutually reinforcing effect of incremental structural reforms implemented with active engagement of the social partners. Directors also considered that Austria’s social partnership system had played a central role in fostering a broad consensus and support for these policies, especially with regard to social and labor policies. The authorities’ resolve to reduce the general government deficit had successfully achieved first-round euro participation.

Directors considered that Austria was well placed, given its moderate wage increases and rapid productivity growth and resulting gains in competitiveness, to benefit from the recovery in world demand, and that near-term economic growth was likely to continue at rates above the EU average. Several Directors also observed that euro area monetary conditions were too accommodative for Austria, as the economy was operating close to potential. Indeed, the recentmonetary easing had strengthened the case for credible and prudent fiscal policy. More generally, Directors encouraged the authorities to use the current economic situation to accelerate the necessary progress, both with regard to fiscal consolidation and structural reforms, in particular with regard to labor and product markets.

On the near-term fiscal outlook, Directors urged a steady implementation of the 1999 budget, and, in particular, called for resistance to spending pressures in the run-up to the October election. In this regard, several Directors pointed to the need to reverse the slippages in fiscal policy last year, but several others recognized the importance the authorities attach to garnering the necessary social consensus for fiscal action, especially after a period of intense adjustment.

Over the medium term, Directors considered that there was a need for a more ambitious fiscal stance to allow sufficient room for automatic stabilizers and countercyclical fiscal measures, to lower the debt-to-GDP ratio, and to address the problem of population aging. They noted that the 2000 budget required a substantial fiscal effort to offset the revenue losses resulting from the recent tax reduction agreement, and to meet the need for further deficit cuts. In this regard, Directors were encouraged by the authorities’ expectation that the 2000 budget will be able to ensure compliance with the government’s Stability Program, especially in view of the authorities’ demonstrated resolve in attaining their fiscal objectives in previous periods. Nevertheless, and pointing to the still high expenditure-to-GDP ratio, Directors underscored that the fiscal consolidation should be pursued through durable reductions in expenditure, in particular by curtailing social transfers, rather than tax increases. They welcomed the pending renegotiation of the revenue-sharing agreement, which they said should be used to reorder the fiscal relationship among the different levels of government by establishing a better balance between assigned tasks and own financial resources. While recognizing that this was not a simple process, Directors stressed that it was crucial for furthering overall fiscal consolidation. They also viewed the incipient demographic pressures on the pension and health care finances as an additional argument for rapid fiscal consolidation.

Directors considered Austria’s banking system sound. However, in view of Austrian banks’ significant involvement in the Central and Eastern European transition economies and recent provisions against exposure to Russia, a number of Directors expressed concern about the risk exposure of the Austrian financial system. They recommended that the high level and continued rapid growth of lending in foreign currencies to households and small companies be monitored closely, as sudden exchange rate fluctuations could result in large credit losses. In this context, Directors urged the authorities to build on their recent initiatives to tighten bank supervisory practices by establishing an operationally independent supervisory authority with sufficient legal instruments to efficiently prevent excessive risk taking.

To meet the challenges of European integration and globalization, Directors encouraged the social partners to continue to work cooperatively and effectively, as in the past, at enhancing the functioning of labor, product, and financial markets. They noted the successful role that certain active labor market policies had played in addressing labor market issues in Austria, especially in reducing youth unemployment, but also encouraged the authorities to pursue simultaneously market-based measures. More flexible labor and product markets would enhance job creationand stimulate self-employment. Several Directors also encouraged the authorities to carry forward the process of withdrawing from ownership of enterprises producing goods and services, including financial institutions. Directors recommended that the opening of product markets be completed and the regulatory framework, including the competition law, be strengthened.

Directors welcomed the authorities’ provision of official development assistance, and encouraged them to increase it toward the United Nations target.

In closing, Directors reiterated their praise for Austria’s impressive achievements in recent years, and most added that they felt confident that the authorities would continue to implement appropriate policies.

Austria: Selected Economic Indicators

1996 1997 1998 1999 1/ 2000 1/

Real economy (change in percent)
Real GDP 2.0 2.5 3.3 2.0 2.5
Domestic demand 1.7 1.8 2.6 1.9 2.3
CPI (year average) 1.9 1.3 0.9 1.0 1.3
Unemployment rate (in percent) 2/ 4.3 4.4 4.5 4.3 4.1
Gross national saving (percent of GDP) 21.6 22.9 23.6 23.7 23.7
Gross domestic investment (percent of GDP) 23.7 25.3 25.7 25.4 25.1
Public finance (percent of GDP)
Central government balance -4.2 -2.6 -2.5 -2.5 -2.3
General government balance -3.7 -1.9 -2.1 -2.0 -1.8
General government debt 69.8 64.3 63.1 62.9 62.4
Money and credit (end of year, percent change)
Domestic credit 3.7 3.9 3.7 ... ...
M3 1.8 1.2 6.4 ... ...
Interest rates (in percent) 3/
Money market rate 3.2 3.4 3.5 2.6 ...
Government bond yield 6.3 5.7 4.6 4.5 ...
Balance of payments (percent of GDP)
Trade balance -4.2 -3.0 -2.8 -2.3 -1.9
Current account -2.1 -2.4 -2.1 -1.7 -1.4
Fund position (as of May 1999)
Holdings of currency (in percent of quota) 57.1
Holdings of SDRs (in percent of allocation) 106.7
Quota (in millions of SDRs) 1,872.3
Exchange rate
Exchange rate regime EMU Member
Present rate (June 16, 1999) euro 0.97 per US$
Nominal effective rate (1990=100) 4/ 105.2 102.9 103.1 102.3 ...
Real effective rate (1990=100) 4/ 5/ 88.6 84.4 84.2 83.2 ...

Sources: IMF, International Financial Statistics, and World Economic Outlook; and IMF staff projections.
1/ IMF staff projections.
2/ In percent of labor force based on EU standards.
3/ Data for 1999 refer to June 16, 1999.
4/ Data for 1999 refer to May.
5/ Based 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 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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