Austria: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, June 15, 2021
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- Published: June 15, 2021
Mission summary and headline assessment
- Austria entered the pandemic with strong macroeconomic indicators and a healthy financial sector but suffered a sharp decline in economic activity in 2020 despite robust government support efforts.
- Recovery is expected in 2021-22, but at a somewhat slower pace than in many other EU countries.
- The fiscal deficit jumped due to lower activity and pandemic support spending, but the fiscal situation remains manageable, with the deficit set to fall to near pre-crisis levels in the medium-term.
- The government’s recovery package focuses on boosting investment, greening the economy, and fostering digitalization, but IMF staff consider it could be expanded further to aid the recovery and limit scarring.
- Austria has ambitious greenhouse gas emissions goals, but additional steps will be required, including carbon pricing, more support for improving the thermal efficiency of buildings and a faster transition to clean transport.
- The financial sector has weathered the downturn well, with profitability remaining positive and non-performing loans low; continued vigilance is needed as corporate sector weakness may still affect banks.
- Corporate equity support measures could mitigate solvency risks and facilitate the recovery.
Economic outlook
- Real GDP contracted by 6.3 percent in 2020.
- IMF staff anticipate growth of around 3½ percent in 2021.
- Growth is expected to accelerate to 4½ percent in 2022 and then gradually settle back to medium-term potential of around 1¾ percent.
- Real GDP level is projected to remain below its pre-COVID trend by about 1¼ percent in 2026.
- Inflation is expected to rise to around 2 percent in 2021.
- Sectoral prospects:
- Slower recovery: tourism, hospitality.
- Faster recovery: industry, construction.
Crisis response and fiscal policy — measures, outlook, and recommendations
- Fiscal outcomes and projections:
- Deficit rose to 8.9 percent of GDP in 2020.
- Deficit expected to be around 6½ percent of GDP in 2021.
- Debt rose from 70½ percent of GDP before the crisis to an expected peak of 86 percent of GDP in 2022 before falling in the medium term.
- IMF staff expect the deficit should fall below 1 percent of GDP in the medium-term once pandemic emergency measures are ended, and the debt-to-GDP ratio will begin to fall even without consolidation measures.
- Pandemic fiscal support totaled around 13 percent of GDP (total measures).
- Measures amounting to 7¼ percent of GDP in 2020 played a crucial role.
- Revised 2021 budget added additional spending and forgone revenue of over 5 percent of 2020 GDP.
- IMF staff recommendations on emergency support:
- Continue flexible emergency support as long as needed, while progressively targeting it on the most affected sectors and households.
- Recovery package and recommended additional stimulus (2021–24):
- Authorities’ package foresees some 6 percent of GDP in new spending and lower taxation over 2021–24, frontloaded in the first two years.
- IMF staff recommend expanding support by ½-1 percent of GDP per year in 2021-24 through:
- Targeted hiring subsidies for young and disadvantaged workers, and enhanced skills and language training.
- A support scheme to boost equity in private firms (particularly SMEs) to improve corporate balance sheets and spark additional investment.
- Continuing to reduce the labor tax wedge by cutting income taxes on the second and third lowest income brackets (as foreseen in the pre-pandemic government program).
- Additional spending to accelerate digitalization.
- More resources for thermal conversion of buildings and a faster transition to emissions-free transport.
- IMF staff view this additional stimulus as accelerating the recovery, reinvigorating growth, and bringing GDP closer to its pre-crisis trend.
Climate and green transition
- Recovery package includes climate-friendly investment incentives, decarbonizing public transport, forest conservation, scaling-up renewables, and green renovation.
- IMF staff analysis on carbon pricing:
- Recommend phased introduction of higher carbon prices, starting with €25/mt per year in 2022 and increasing gradually to €100/mt per year by 2030.
- Coupled with expanded energy efficiency measures, this would bring Austria closer to its climate goal.
- Use of carbon-pricing revenues:
- Compensate low-income and vulnerable households for additional costs.
- Boost spending on climate-friendly investment and employment generation.
- Some revenue could be used to finance tax cuts in other areas.
- Recommendation to adopt green budgeting practices at federal, regional, and municipal levels to integrate climate considerations into fiscal frameworks.
- Despite measures, projections show Austria would remain far short of reaching its emissions reduction target without further action.
Structural issues and labor market policies
- Short-time work scheme (STWS) absorbed a substantial fraction of potential job losses and mitigated unemployment increases.
- IMF staff recommendations for labor market support and reallocation:
- Progressively target STWS and other support toward those most affected.
- Targeted hiring cost subsidies and job search assistance to revive employment for hardest-hit segments.
- Policies to reduce regional and skill mismatches, including German language training for migrant and refugee workers, re-skilling programs, and relocation assistance.
- Digitalization:
- Austria lags behind the EU average in three of five EU Digital Economy and Society Index categories (digital connectivity, use of internet services, and integration of digital technology).
- Staff suggest additional spending on digital access and utilization, including support to high-technology start-ups, funding for firms’ digitalization projects, and ICT-skills training.
- Aging and long-term spending pressures:
- Pension system currently financially healthy; recent reform tightening early retirement schemes is welcomed.
- Effective retirement age and statutory retirement age remain low by international standards; labor force participation for those 55-64 is well below EU and OECD averages.
- Further actions advisable to address future pension and health care cost pressures from aging.
Corporate and financial sectors — vulnerabilities and policy advice
- Corporate sector:
- Corporate debt-to-income ratio surged by 13 percentage points in 2020:H1, creating potential solvency challenges.
- IMF staff analysis suggests an equity gap of around 1–2 percent of GDP compared to pre-crisis levels after policy support.
- Recommended measures to address solvency:
- Introduce solvency support mechanisms consistent with EU state-aid rules, with private sector participation in selection and monitoring and allowing nonviable firms to exit.
- Consider a notional tax deduction on equity to supplement such schemes.
- Enhance debt restructuring mechanisms, provide tools and incentives for voluntary debt resolution, pre-emptively increase court capacity, and swiftly implement the EU Restructuring Directive (Directive 2019/1023).
- Banking sector:
- Financial sector was generally healthy before the pandemic and has withstood the crisis well.
- Profitability has declined but remained positive in aggregate.
- Non-performing loans (NPLs) have not risen much due to strong support, though loans classified under IFRS as Stage II spiked (risk of future NPLs).
- Banks have built provisioning following EBA and ECB guidelines.
- IMF staff simulations indicate Austrian banks would see only limited capital depletion due to policy measures enacted since the crisis.
- As support policies are unwound, asset quality could worsen; authorities should remain vigilant.
- Banks should address persistently high underlying operating costs.
- Housing and real estate:
- Pre-pandemic analyses indicated house price overvaluation in a range of 15–30 percent.
- During the pandemic, housing prices—particularly in the single-family segment—increased by a further 10 percent.
- Lending guidelines by the Financial Market Stability Board have not curbed risky lending; IMF staff recommend considering imposing binding limits to contain risks once the acute phase of the crisis is past.
- Supervision and deposit protection:
- Failures of two small banks in 2019 and 2020 highlighted need to strengthen supervision of less significant institutions; a working group was tasked with drawing lessons and its recommendations should be implemented promptly.
- Deposit guarantee system is robust and on track to meet Deposit Guarantee Schemes Directive requirements for accumulating reserves by 2024, but fragmentation from the withdrawal of the Raiffeisen sector from the main scheme introduces potential inefficiencies.
Closing acknowledgements
- The mission thanked counterparts in the OeNB, the government, FMA, and the private sector for excellent organization and fruitful discussions.
Austria: Staff Concluding Statement of the 2021 Article IV Mission (June 15, 2021) — IMF Communications Department.