Austria: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, June 13, 2022
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- Published: June 13, 2022
Mission overview and key judgments
- Austria was one of the most affected EU economies by the COVID pandemic but rebounded well; recent quarters show strong growth and real GDP surpassed its pre-COVID level in 2021Q4.
- The war in Ukraine is a significant new shock that has raised downside risks considerably.
- Austria has fiscal space that should be used to build resilience to energy shocks, diversify energy sources, and accelerate investment in the green transition.
- Policies to cushion vulnerable households and firms from inflation and high energy prices are appropriate if they are temporary, targeted, and do not distort energy price signals.
- The eco-social tax reform is a positive step and should be implemented quickly.
- The financial sector remains healthy and profitable, but risks have risen from the war in Ukraine and continued housing price inflation; prudential measures are recommended.
- Integration of refugees (including recently arrived Ukrainians) and immigrants into the labor force, addressing skills and regional job mismatches, boosting digitalization, and increasing labor force participation among older workers would raise Austria’s growth potential.
Economic outlook
- Growth projections and drivers:
- Growth is now projected to slow to about 4 percent in 2022, from 4.8 percent in 2021, and moderate further in 2023 as sanctions are assumed to remain in place.
- Strong services sector growth and buoyant private consumption in 2022Q1 led IMF staff to revise upward growth for 2022.
- Inflation:
- Price hikes driven initially by supply chain bottlenecks; the war has aggravated pressures mainly through a sharp increase in energy prices.
- IMF staff expect 12-month inflation to peak in the coming months and gradually decline in the second half of the year.
- For the entire year, we project inflation to average around 7 percent.
- Risks (tilted to the downside):
- Potential escalation of the war in Ukraine could depress the European outlook and impair confidence.
- An abrupt stoppage in natural gas supplies could have major adverse effects on households and production.
- Continued supply chain disruptions and further increases in energy and commodity prices could lead to higher and more persistent inflation.
- Pandemic evolution and a housing price correction are additional risks.
- Upside: a quick solution to the war and rapid phase-out of energy imports from Russia could accelerate the green transition and strengthen resilience.
Economic policies to build resilience and accelerate the green transition
- Policy priorities:
- Provide targeted, temporary, and non-distortive relief measures to vulnerable households and affected firms.
- Build resilience to energy shocks via investment in energy storage and transport facilities from alternative sources.
- Accelerate the green transition through timely implementation of the eco-social tax reform and additional climate-friendly measures.
- Assist refugees and help integrate them quickly into the Austrian labor market.
- Fiscal space and consolidation:
- The 2022 deficit is expected to fall to around 2.5 percent of GDP due mainly to the unwinding of temporary pandemic support and strong economic growth.
- Under current policies, the deficit would decline to around ½ percent of GDP in the medium-term, and the debt-to-GDP ratio would fall below 70 percent of GDP.
- IMF staff believe Austria could undertake a slightly slower fiscal consolidation path and use additional resources to build resilience against energy shocks and increase green investment and productivity-enhancing reforms.
- Current support measures:
- Government measures to address inflation and immediate effects of the war total around 1 percent of GDP.
- Many measures are appropriately targeted and temporary; some, such as a temporary cut in the tax rate on household energy, are costly, less targeted, and could undermine green transition efforts by distorting price signals.
- IMF staff recommend any additional support should allow full pass-through of international prices to consumers while providing more targeted and temporary transfers.
Energy security and transition actions
- Dependence and vulnerability:
- About 20 percent of final energy consumption is dependent on natural gas of which about 80 percent is Russian.
- Existing studies estimate an output loss of about 1-3 percent of GDP over one to two years in the event of a gas shutoff from Russia, depending on gas substitutability and shortfall extent.
- Short- and medium-term recommendations:
- Support the government’s contingency planning to build gas reserves (strategic gas reserve) for the near term.
- Simultaneously pursue sustainable medium-term solutions: conservation incentives (including a bonus-malus system), incentives to prepare for fuel switching in electricity production, and diversification of gas supplies in coordination with EU partners.
- Accelerate measures to increase domestic green energy production and speed the transition away from fossil fuels via public investment and cooperation with—and incentives for—the private sector.
Eco-social carbon tax and fiscal design
- The eco-social carbon tax:
- Covers emissions in the transportation and building sector, currently outside of the EU-ETS scheme and accounting for about 40 percent of nation-wide emissions.
- Designed to be revenue neutral in the medium-term and provides transfers to households to compensate for higher energy prices.
- Includes a price stability mechanism to shield consumers from excessive energy inflation in any given year.
- IMF staff support protection for vulnerable households but advise against increasing broad-based compensation beyond the medium-term neutrality objective as it would be poorly targeted, distortive, and erode fiscal space.
- Implementation guidance:
- Staff encourage rapid implementation; delays will hinder climate and energy transition objectives.
- When the fixed price scheme is phased out to a market-based one, staff encourage planning against an abrupt transition and ensuring the market price does not fall below the terminal fixed price of €55 per ton.
- Income tax reform:
- Staff welcome planned personal income cuts in the second and third-income brackets.
- Support indexing personal income tax brackets to inflation to counter rising labor tax wedge due to bracket creep and higher inflation.
Protecting resilience and stability in the financial sector
- Banking sector soundness and risks:
- Banks have adequate capital and liquidity buffers; earnings have been robust.
- Limited balance sheet and market spillovers from the war so far, partly due to strong local liquidity management in Central, Eastern and South-Eastern European (CESEE) subsidiaries.
- Prolonged war and CESEE spillovers could increase market volatility, pressure lending, and dim profitability prospects.
- Macroprudential and supervisory recommendations:
- Authorities could consider calibrating the parameters of existing systemic risk buffers (SyRB and O-SII) for banks with pronounced exposures in Russia and CESEE countries.
- The counter-cyclical capital buffer has been so-far maintained at the rate of 0 percent; authorities should plan for future activation depending on macro outlook and credit growth (currently slightly beyond prudential thresholds).
- Real estate vulnerabilities:
- Residential real estate prices have continued to rise strongly with increasing signs of overvaluation on the OeNB’s metric.
- Mortgage lending has risen considerably with deviations from Financial Market Stability Board (FMSB) prudential guidelines.
- IMF staff strongly support the FMSB plan to make binding the upper limits for loan-to-value ratios, debt-service-to-income ratio, and loan maturities effective in the coming weeks; authorities should monitor effectiveness and adjust if needed.
- Consider additional capital-based macroprudential measures, such as a sectoral systemic risk buffer calibrated to real-estate exposure, if vulnerabilities persist.
- Commercial real estate risks warrant close monitoring and collection of granular data.
- Non-performing loans are low, but loans with deteriorated credit quality (‘Stage 2 exposures’) merit continued monitoring.
- Deposit insurance and resolution:
- The orderly liquidation of Sberbank Europe tested the Austrian deposit guarantee system (DGS) successfully; all three Austrian DGS institutions provided resources in a timely fashion.
- IMF staff remain concerned about potential inefficiencies in the fragmented deposit insurance system.
- Staff welcome a working group to strengthen supervision of less significant institutions and recommend implementing the group’s proposals; headcount increases for LSI supervision at OeNB and FMA are underway.
Structural reforms to reduce scarring and boost inclusion
- Labor market performance and challenges:
- Employment is above pre-COVID levels; overall unemployment and long-term unemployment rates are below previous levels.
- Evidence of growing skills and regional mismatches in the labor market.
- Recommended labor market measures:
- Support worker reallocation and reduce mismatches via re-skilling programs and relocation assistance.
- Rapidly integrate refugees from Ukraine to help resolve labor shortages.
- Improve labor market outcomes for immigrants via combined language and work-oriented activity assistance and targeted wage subsidies.
- Provide more child-care to address employment and participation gaps among immigrant women.
- Expand labor market access to all asylum seekers and implement accreditation schemes for humanitarian migrants.
- Digitalization and productivity:
- Accelerate the digital transition where Austria lags EU peers (digital connectivity, use of internet services, integration of digital technology) to boost productivity and growth potential.
- Digital spending can also support the green transition by enabling work-from-home, online banking and commerce, lowering transport needs and emissions.
- Aging and labor participation:
- Austria’s pension system is currently financially healthy due to past reforms, but effective and statutory retirement ages remain low by international standards.
- Labor force participation for those 55-64 remains below EU and OECD averages.
- Long-term aging will increase pension and health care costs while contributions decline; reforms to increase participation of older citizens and address future liabilities would be appropriate.
The mission thanks the authorities and counterparts for constructive policy dialogue and productive collaboration.