Austria: Concluding Statement of the 2024 Article IV Mission
IMF News, March 1, 2024
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Bibliographic details
- Published: March 1, 2024
Mission and visit
- Mission led by Kevin Fletcher, comprising Adil Mohommad, Magali Pinat, and Mengxue Wang.
- Visit period: February 16-March 1, 2024.
- Purpose: discussions on the 2024 Article IV consultation.
Overall assessment and baseline outlook
- Nimble policy responses mitigated major shocks: the pandemic, the energy price shock, and the rise in interest rates to contain subsequent inflation.
- Growth trajectory:
- Economy contracted by 0.8 percent in 2023.
- Expected to expand by around ½ percent in 2024 as rising real wages support higher consumption.
- Projected to reach near 1½ percent during 2025-26 as effects of monetary tightening fade and investment recovers.
- Further out, growth projected to fall to around 1 percent due to demographic headwinds from population aging.
- Inflation:
- Headline inflation declined to 4.3 percent in January from double digits a year ago.
- Core inflation remains elevated at 5.4 percent.
- Inflation is expected to decline to near the two percent target by mid-2025.
Risks to the outlook
- Upside risk: stronger-than-anticipated boost from external demand.
- Downside risks:
- Intensified Red Sea trade disruptions.
- Further shocks to global commodity markets, especially gas.
- Continued dependence on Russian gas exposes industries and consumers to renewed supply disruptions despite currently high levels of gas storage.
- Domestic risk: abrupt correction in housing and commercial real estate markets affecting financial sector and household balance sheets.
- If inflation becomes entrenched above the euro-area average, Austria’s competitiveness could be damaged over time.
Labor market and demographics
- Recent developments:
- Employment rate hit a record-high in mid-2023.
- Unemployment rate remains moderate; modest uptick in second half of 2023.
- Job vacancy rates remain above pre-pandemic levels.
- Nominal wage growth exceeded the euro-area average in 2023.
- Structural challenges and recommendations:
- Working-age population projected to shrink considerably over the medium term.
- Reduce gaps in labor force participation:
- Address high rates of part-time employment among female employees; childbearing-year participation gap linked to uneven childcare supply.
- Recently adopted plans to increase fiscal support for childcare are welcome but could be expanded with more ambitious targets.
- Close gender wage gaps to strengthen incentives for full-time work.
- Increase labor-force participation among older workers:
- Standard pension retirement age for women is rising to equal that for men; consider further pension reforms such as linking retirement age to life expectancy.
- Deepen efforts to integrate immigrants into the labor force.
Fiscal policy recommendations
- Near-term:
- Authorities should seek opportunities to overperform on the fiscal deficit target for 2024.
- Save any revenue overperformance and avoid adopting new deficit-creating measures during the year.
- Phase out remaining energy-price relief measures as early as possible given lower wholesale gas prices.
- Fiscal policy should remain agile: ease adjustment if growth and inflation surprise sharply on the downside; accelerate adjustment if they surprise on the upside.
- Medium-term consolidation needs:
- Rising structural fiscal costs (aging, defense, green transition, digitalization) could push public expenditure up by 3-4 percent of GDP by 2030.
- Substantial fiscal adjustment measures needed to offset rising spending and put public-debt ratio on a clear downward path.
- Policy options include:
- Reducing subsidies and tax expenditures, especially environmentally harmful ones.
- Updating property tax valuations (last comprehensive update based on actual market prices was in 1973).
- Pension reforms.
- Target: bring down the structural primary balance close to zero by 2028, with structural adjustment of about 0.3 percent of GDP per year during 2025-28.
- Result: stabilize debt below the Stability and Growth Pact target of 60 percent of GDP while providing a modest cushion against adverse shocks.
Financial sector assessment and recommendations
- Current state:
- Financial system stable, liquid, and profitable.
- Banks had record-high profits over the past two years on rising interest margins.
- Banking sector CET1 capital ratio stood at 16.6 percent in mid-2023, comparable to the EU median; average ratio for the largest Austrian banks somewhat below typical EU comparators.
- Liquidity-coverage ratio at 168 percent.
- Pension and insurance companies appear liquid and well capitalized.
- Austrian banks’ CRE lending rose to 20 percent of total loans (using a broad CRE definition) as of Q3 2023.
- Recommendations for banks and supervisors:
- Use high profits to strengthen capital buffers and improve protection against adverse shocks.
- Continue to be conservative in capital distributions.
- Boost investment in security technology to insure against cybersecurity risks.
- Maintain current countercyclical capital buffer at zero given the negative credit gap; increase it once the credit cycle turns into expansionary territory.
- Maintain prudent lending standards for residential real estate:
- Keep limits on loan-to-value ratios and debt-service-to-income ratios introduced in 2022 as permanent structural measures.
- Recognize that limits are flexible due to substantial exemptions and are not economically binding for many banks currently.
- Focus affordability efforts on boosting housing supply by easing disincentives and regulatory constraints on new construction (e.g., slow permitting procedures), reviewing land-use and rental regulation, and increasing taxes on vacant land zoned for residential housing.
- Commercial real estate (CRE) vigilance:
- Continued close monitoring warranted amid a significant downturn in many CRE markets in Europe and the US.
- Data gaps complicate full macroprudential assessment; authorities should close gaps by producing and publishing data on CRE prices, rental returns, and debt-service coverage ratios.
- Note: a large Austrian real estate company failed in recent months.
- Regulatory and resolution recommendations:
- Implement outstanding recommendations from IMF staff’s 2020 Financial System Stability Assessment, notably:
- Measures to strengthen the statutory independence of financial supervision and regulation.
- Revising bankruptcy and resolution legislation to facilitate fast and efficient resolution of troubled financial firms and broader crisis management.
Structural reforms beyond labor and housing
- Green transition:
- Austria implemented a national carbon price and expanded renewable energy generation.
- Current emission reduction trajectory falls short of commitment to reduce emissions not covered by the EU emissions trading system by 48 percent relative to 2005 levels.
- Target: 100 percent electricity generation from renewable sources by 2030, requiring substantial new investment.
- Recommendations:
- Commit necessary resources.
- Reduce permitting delays to speed green infrastructure investment.
- Upgrade electricity grids.
- Address skill shortages in occupations critical for the green transition.
- Geoeconomic fragmentation and competitiveness:
- At the EU level, support solutions to reduce fragmentation and preserve benefits of global integration and multilateralism.
- Bolster resilience to geoeconomic fragmentation by:
- Identifying specific products exposed to fragmentation risk.
- Stress-testing supply chains.
- Developing strategies to cope with potential disruptions.
- Accelerating the green transition to strengthen energy security.
- Expand digitalization, including implementing Austria’s 2030 Broadband Strategy, to retain competitiveness and improve medium-term growth prospects.
Closing
- The mission thanks the authorities and counterparts for constructive policy dialogue and productive collaboration.
Source: IMF mission concluding statement, Vienna, March 1, 2024.