IMF Executive Board Concludes 2013 Article IV Consultation with AustriaPress Release No.13/331
September 10, 2013
On September 4, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Austria.1
Austria remains an area of relative strength in the European landscape, but the economy is being affected by the regional slowdown, with growth in 2012 falling to 0.9 percent, from 2.8 percent in 2011. Both external and domestic demand components have been weak, reflecting developments in main trading partners, investment uncertainty, an unwillingness of households to further reduce their savings rate, and fiscal consolidation. While employment growth remained relatively strong in 2012, labor market conditions are now weakening. As a consequence, unemployment has gradually increased, but remains low. Inflation fell from its 2011 peak of 3.6 percent to 2.6 percent in 2012 and stood at 2.2 percent in June 2013, with comparatively high price growth in the services sector. Wage increases in 2012 exceeded inflation only slightly, leading to modest real wage growth.
The current account is showing a modest surplus, which has fallen considerably from its pre-crisis level of almost 5 percent of GDP in 2008 and amounted to 1.8 percent of GDP in 2012, with a deficit in goods more than offset by a surplus in services. The real effective exchange rate has appreciated somewhat in 2012, reflecting the positive inflation differential with major trading partners.
Prospects are for a gradual recovery for the remainder of 2013 and 2014, consistent with the modest pick-up in external demand suggested by some high frequency indicators, a subsequent recovery in investment activity, some catching-up of private consumption on the back of modest growth in real wages and disposable income, and fiscal expansion in 2013.
On the back of broad-based underspending (including on interest cost) and overperforming labor taxes, the headline and structural deficit amounted to respectively 2.5 and 1.3 percent of GDP in 2012. Given last year’s favorable outcome, the 2013 budget now implies a structural expansion. Gradual adjustment is planned to resume in 2014, and a structural deficit of 0.45 percent is targeted for 2016, in compliance with Austria’s new fiscal rule framework. Gaps in expenditure efficiency remain considerable, and the fiscal burden on labor is heavy.
Financial stability and related policies were recently evaluated under the IMF’s Financial Sector Assessment Program (FSAP). The FSAP noted that Austria’s large banking system, which plays a dominant role in Central, Eastern and South-Eastern Europe (CESEE), appears resilient to adverse scenarios on the whole. Aggregate bank capitalization, funding and liquidity conditions have improved, and Austrian banks’ foreign subsidiaries have reduced their reliance on parent bank funding. Nevertheless, bank asset quality is still deteriorating in several CESEE countries, while depressed credit demand is hurting profitability. Adverse spillovers from Austria to the CESEE through deleveraging have been contained thus far. A group of intervened medium-sized banks face uncertain prospects and pose significant but manageable fiscal risks.
Executive Board Assessment2
Executive Directors commended the authorities for their prudent macroeconomic management, which has helped maintain healthy macroeconomic fundamentals in a challenging global environment, and welcomed prospects of a gradual economic recovery. Directors noted the risks arising from volatile global financial markets, lingering uncertainties in the euro area, and vulnerabilities in CESEE countries where Austrian banks have large exposures. Against this background, Directors concurred that the post-election agenda should focus on further enhancing financial sector resilience, strengthening public finances, and boosting potential growth.
Directors welcomed the strong fiscal performance in 2012 and considered the mildly expansionary stance envisaged in the 2013 budget as appropriate. They stressed, however, that the recently-announced stimulus package should be financed within the existing envelope and encouraged the authorities to identify specific measures needed to achieve the consolidation planned for the medium term.
Directors noted that bank restructuring will have further significant, though manageable, fiscal costs. They recommended compensating for these costs by gradually strengthening medium-term fiscal adjustment. Directors agreed that a faster downsizing of non-viable entities and disposal of troubled assets would help contain bank restructuring costs.
Directors underscored that further reforms remain necessary to make public spending more efficient, especially in the areas of pensions, health care, and subsidies. In addition, they emphasized that better aligned spending powers and financing responsibilities in the federal system would facilitate expenditure rationalization. Directors noted that expenditure savings could be used to address low work incentives, particularly for women and low-skilled workers, which are hampered by high labor taxes and social security contributions as well as a complex and costly family benefit system. Some Directors stressed the need for a comprehensive approach to this issue.
Directors welcomed the overall results of the FSAP. Notwithstanding the overall system resilience to shocks, they recommended that large internationally active banks be encouraged to strengthen their capital buffers. Directors stressed the need to reinforce financial oversight and promote better risk management and governance practices, especially in the small- and medium-sized bank segment, to prevent a recurrence of past problems.
To further reduce the potential for adverse feedbacks between bank and sovereign risk and possible associated spillovers, Directors advised comprehensive reforms, including a strengthened framework for early intervention and resolution, a bank resolution fund, and a unified, publicly administered, and pre-funded deposit insurance scheme. While many Directors underscored the urgency of new legislation on these topics, a number drew attention to the need for consistency with the forthcoming EU directives. Directors welcomed recent progress in strengthening the macroprudential framework.
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