IMF Executive Board Concludes Article IV Consultation with Austria

Public Information Notice (PIN) No. 07/48
May 2, 2007

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 2007 Article IV Consultation with Austria is also available.

On April 23, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Austria.1


Austria's economy is doing well. Economic activity has been strong in recent years, with relatively high growth and declining unemployment. This favorable economic outcome is due to a combination of stability-oriented macropolicies, a range of structural reforms, strong international competitiveness resulting from a social partnership that facilitates wage moderation, and an orientation towards fast-growing economies in Central, Eastern, and Southeastern Europe (CESE).

The economy gathered speed in 2004-05, and growth is estimated to have reached 3.2 percent in 2006 - the highest since 2000. Growth in 2006 has been broad based with strong exports, continued private consumption growth, and a considerable pick-up in investment. Recent leading indicators, on both the production and consumption side, have been mostly positive. In line with developments elsewhere in Europe, economic growth is expected to slow somewhat in 2007, but remain strong at close to 3 percent.

Inflation came down in 2006 and was limited to 1.7 percent and wages have been increasing modestly despite higher labor demand. As economic activity picked up in recent years, employment growth accelerated and put unemployment on a downward trend. Austria's competitiveness and external position remain strong with a positive current account balance resulting from strong export growth.

Aided by cyclical developments, the fiscal deficit narrowed in 2006. Corporate income taxes performed well above expectations, and sales taxes also surprised on the upside. Initially, the 2006 deficit was projected to be 1.8 percent of GDP, but it is now estimated at 1.2 percent. In contrast, the structural deficit showed a small worsening in comparison to previous years. The public debt ratio came down in 2006, while remaining above the Maastricht reference value of 60 percent.

The banking sector continues to do well overall. It remains well-capitalized and profitable, with limited nonperforming loans, and the banks' ratings are generally in line with those of their peers. Activities in CESE remain important, both for the region, and as an important source of profit for the banks, as the Austrian banks increased their already large exposures to and market shares in this region. The authorities are taking action to further improve monitoring of the Austrian banks' activities in CESE, including foreign currency lending, and are also stepping up collaboration with host supervisors.

Executive Board Assessment

Executive Directors welcomed Austria's strong economic performance, which testifies its commendable record of sound macroeconomic policies and structural reforms, and has consistently surpassed that of the euro area. Economic growth in 2006 was broad-based and the highest since 2000; unemployment has been relatively low and declining; inflation remains well contained; and the fiscal deficit has come down. Directors expected the economy to continue to do well, based on continued strong international competitiveness and a positive outlook for Europe.

Directors noted that continued wage moderation will be essential to maintain Austria's competitiveness. Wages have been increasing only modestly, keeping unit labor costs in check, despite higher labor demand. Directors welcomed the recent agreements between social partners for 2007, which suggest that this trend will continue.

Directors supported the authorities' objective of maintaining a balanced budget over the cycle, and, in this context, felt that a more ambitious fiscal consolidation would be desirable at the present juncture. They noted that the current budget proposals plan only a limited decline in the deficit during a period of high growth, and that the target date for balancing the budget has been shifted from 2008 to 2009-10. Accordingly, Directors recommended an earlier return to balance based on fiscal adjustment rather than relying largely on the automatic stabilizers. In any case, unexpected windfalls should be saved.

Directors encouraged the authorities to move expeditiously on identifying and starting to implement expenditure savings. They noted that public administration, subsidies and transfers, pensions, and health care would be important areas for efficiency gains, while supporting increased spending on research and development, infrastructure, and education. Although there has been progress in streamlining public administration at the federal level, efforts are lagging at the local levels. Further streamlining of the functions of the various levels of government will therefore be essential for expenditure control. In this regard, Directors urged the authorities to use the opportunity of the grand coalition government to restart the constitutional reform process necessary for such reforms. They welcomed the planned adoption of a formal medium-term budgetary framework that sets explicit expenditure targets consistent with the fiscal objectives.

Directors welcomed the authorities' intention to consider tax cuts only towards the end of the government period, once expenditure measures have been implemented. This will be key to safeguarding the objective of reaching a balanced budget over the cycle. Future tax cuts should be focused, in particular, on reducing the burden on labor.

Directors noted that the banking system remains well capitalized and profitable, with limited nonperforming loans. However, they emphasized that the rapidly expanding activities of the financial sector require close monitoring and effective risk management. While the expansion by Austrian banks into CESE has been very profitable and helped financial deepening in the host countries, the risks have also grown. The growth of foreign currency lending by the banks warrants special attention. Directors emphasized the importance of both domestic and cross-border supervision. They welcomed the agreements signed between Austrian and foreign supervisors regarding information exchange and cross-border cooperation, and the efforts to increase consumer awareness of the risks associated with foreign-currency borrowing. Directors urged the authorities to continue to ensure that the banks use adequate risk management techniques, including when preparing for Basel II.

Directors supported the measures taken to further strengthen corporate governance in the banking sector. They recommended the forceful implementation of actions already underway, including more frequent on-site inspections and intensified off-site examinations, and the consideration of additional measures going forward. Directors welcomed the authorities' interest in a Financial Sector Assessment Program update.

Directors supported the focus on structural reform in the government program. They encouraged early implementation of plans for further deregulation, strengthening competition, and enhancing labor participation. Directors welcomed the comprehensive and balanced pension reform that seeks to address aging-related fiscal concerns. Further efforts are however needed to close loopholes encouraging early retirement, to extend the pension reform to the sub-national level, and to reform the health sector.

Directors commended Austria for its official development assistance of about 0.5 percent of GNP in 2006, and encouraged a further increase toward the UN target.

Austria: Selected Economic Indicators

  2002 2003 2004 2005 2006 2007


Real economy


Real GDP (change in percent)

0.9 1.1 2.4 2.0 3.2 2.8

Domestic demand (change in percent)

-0.2 -1.2 2.4 1.5 1.3 2.2

CPI (period average, percent change)

1.7 1.3 2.0 2.1 1.7 1.6

Unemployment rate (in percent)

4.2 4.3 4.8 5.2 4.8 4.5

Gross national saving (percent of GDP)

21.1 21.5 21.4 22.0 22.8 23.2

Gross domestic investment (percent of GDP)

20.7 21.7 21.3 20.8 21.1 21.4

Public finance (in percent of GDP)


Central government balance

-1.3 -2.0 -1.5 -1.9 -1.6 -1.6

General government balance

-0.7 -1.8 -1.3 -1.6 -1.2 -1.2

General government balance (EDP definition) 1/

-0.5 -1.6 -1.2 -1.5 -1.1 -1.1

General government debt

65.8 64.6 63.8 63.4 62.0 61.0

Interest rates (in percent) 2/


Three-month interbank rate

3.3 2.3 2.1 2.2 3.1 3.8

10-year government bond

5.0 4.2 4.2 3.4 3.8 4.1

Balance of payments (percent of GDP)


Trade balance

1.7 0.4 1.1 1.1 2.5 3.2

Current account balance

0.3 -0.2 0.2 1.2 1.8 1.9

Fund position (as of February 28, 2007)


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. dollar

1.06 0.88 0.80 0.80 0.80 ...

Nominal effective rate (2000=100)

100.5 104.0 105.5 105.3 105.5 ...

Real effective rate (1990=100) 3/

98.1 101.2 94.5 95.5 96.5 ...

Sources: Austrian National Bank; Statistics Austria; Ministry of Finance; IMF staff projections.

1/ Maastricht Excessive Deficit Procedure (EDP); includes revenues from swaps.

2/ 2007 numbers are for February 2007.

3/ Based on relative normalized unit labor cost in manufacturing.

1 Under 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.


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