OECD Economic Outlook, Volume 2019 Issue 1

Austria

Output growth is projected to slow to around 1½ per cent in 2019 and 2020. Private consumption remains a key driver of growth, but the slowdown in the euro area is weighing on investment and trade. Inflation is set to remain close to target.

High tax receipts due to robust employment growth will lead to a modest surplus in the government accounts. Even if the ongoing tax reform will slightly decrease the budget surplus in the short term, some fiscal space is available and could be used to let automatic stabilisers operate if cyclical conditions worsen. More active measures could be considered if developments deteriorate significantly. Structural policy should aim to lift productivity growth by fostering competition in service sectors and to better integrate the most vulnerable groups in Austrian society, in particular the low-skilled elderly, migrants and refugees.

Consumption is the key driver of growth

Economic growth is supported by robust domestic demand, in particular from private consumption. Export growth is suffering from weak growth in trading partners, especially in the key export markets, Germany and Italy. In spite of high capacity utilisation in the industrial sector, skills shortages and damped economic activity in the euro area are dragging down business investment.

The outcome of the wage negotiations in autumn of 2018 was above expectations, supporting household consumption growth, together with reductions in charges on unemployment insurance and the “Family Bonus”, a tax allowance for families for children. Unemployment continues to fall. The rather slow decrease, however, reflects some structural unemployment and strong labour force growth due to the inflow of foreign labour and increasing labour force participation.

Labour market and public debt: Austria

1. Projection since 2019Q1.

2. Maastricht definition.

Source: OECD Economic Outlook 105 database.

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Austria: Demand, production and prices

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More efficient government spending and structural reforms are key for stronger long-term growth

Robust wage and consumption growth have contributed to healthy fiscal revenues and have more than offset lower receipts from social security contribution cuts and the introduction of the “Family Bonus”. Though the reform of the personal and corporate tax system will be fiscally neutral in the long‑term, the budget surplus is projected to decrease moderately. Fiscal policy should use the leeway public finances provide, particularly if there is a more pronounced downturn than expected.

The long-term sustainability of the public finances could be improved by addressing the efficiency of government disbursements and ensuring that all measures are well targeted. Additionally, misalignments of spending and taxing responsibilities across government layers hamper cost‑efficiency. There is scope for structural reforms to boost productivity by simplifying licence systems and further liberalising market entry in services sectors. Moreover, addressing the debt‑bias of the corporate tax system and ensuring sufficient provision of private venture and growth capital would help in tackling the general lack of risk capital in the economy, which impedes innovative activity and the scale-up of young firms and start‑ups.

Economic activity is set to be less dynamic

Output growth is projected to slow to around 1½ per cent in 2019-20. Household consumption will be a key driver of economic activity, as weak external demand attenuates investment and trade growth. Exports will still grow slightly faster than imports, implying that net trade will contribute positively to output growth over the projection horizon and further increase the current account surplus.

Investment and trade may surprise on the upside in 2020, if global trade growth recovers. Even though healthy increases in the amount of internal funds in recent years have strengthened firms’ equity ratios, continued heavy reliance on bank loans make the Austrian economy vulnerable to potential stress in the European banking sector. Moreover, economic growth in Austria is exposed to a further deterioration of global trade disputes and to a more severe and prolonged slowdown of the German economy.