OECD Economic Outlook, Volume 2018 Issue 1

Austria

Economic activity is set to remain buoyant through 2018 and, to a lesser extent, 2019, boosted by strong rebounds in investment and exports. Solid job creation and dynamic wages underpin private consumption. Inflation remains higher than in other euro area countries, mainly driven by prices in sectors that are little exposed to international merchandise trade.

The public deficit is declining albeit less than strong growth would imply. An improvement of public spending efficiency would free up funds for the extension of full‑day schooling and childcare in rural areas, the upgrading of digital infrastructure and investments in life‑long learning programmes. A more equity‑capital‑friendly business environment and further improvements in digital infrastructure would benefit both businesses and households.

Strong demand, both domestic and foreign, underpins growth

A virtuous combination of domestic and international drivers has pushed Austria's growth to heights not seen since the vigorous recovery from the global financial crisis. While the growth cycle seems to have peaked in late 2017, underlying growth remains solid. Labour market participation continues to increase, in particular for women and older workers. Private consumption continues to support growth buoyed by job creation and increasingly strong wage gains. Following some fluctuations in the wake of the 2016 tax reforms, the household saving rate is set to stabilise. Core inflation remains higher than in the euro area partly driven by higher and more dynamic prices in activities related to the vibrant tourism industry.

Building on the cyclical upturn to prepare for the future

Investment is set to remain a strong driver of growth, given high and rising capacity utilisation. Financing of investment relies strongly on internal resources and external funding is dominated by bank loans, in particular for SMEs. The government should step up its efforts to foster venture capital and other forms of equity financing including, for instance, through equity capital allowances with a view to reduce the debt‑equity bias in corporate taxation, but also by reducing barriers to entry. The accumulation of knowledge‑based capital could be accelerated by a swift implementation of Austria's Digital Roadmap, with timelines and quantitative targets.

Austria

1. Current capacity level of utilisation in manufacturing industry. First semester for 2018.

2. In percentage of potential output.

Source: OECD Economic Outlook 103 database ; and Eurostat.

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The fiscal policy stance will ease in 2018, reflecting the new government's policy agenda to reduce tax pressure. To offset the effects on the structural balance, the government should contain public spending, notably by abolishing redundancies in public administration, streamlining the expenses of federally‑owned entities and, as announced, using spending reviews more extensively. Thanks to the cyclical upturn and the winding down of bad banks' assets, the public debt‑to‑GDP ratio is set to decline faster than stipulated by institutional fiscal rules. Available funds should be used to improve the growth potential of the economy. Female labour force participation is still hindered by insufficient full‑day schools and childcare facilities, in particular in rural areas. The adaption of digital technologies by businesses and households could be nurtured by subsidising dedicated life‑long learning solutions.

Austria. Demand, output and prices

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Economic activity is projected to remain buoyant

Following the strong rebounds of investment and exports, which pushed growth beyond the euro area average in 2017 and early 2018, growth is projected to slow somewhat as the investment cycle matures and trade decelerates. Starting from the second half of 2018, Austria's economy is set to grow at a pace similar to that of the euro area as a whole. Household incomes will continue to benefit from robust job creation and real wage growth will turn positive. Inflation is projected to remain above 2% throughout the projection horizon. Performance may surprise on the upside if export market shares rise further, leading to more buoyant investment and growth. Conversely, export performance could resume its trend decline on the back of market share losses in global value chains due to increased competition with eastern European countries. Furthermore, growth could disappoint if reform efforts were to lose momentum, but investment and consumption could be stronger than foreseen if the current high level of confidence holds up.