OECD Economic Outlook, Volume 2019 Issue 2

Austria

Economic growth is projected to edge down over the 2020-21 period as the global slowdown and trade tensions weaken export growth and business investment. Employment will continue to increase and a tight labour market will support income growth. Domestic demand will be the key driver of growth. Inflation will remain subdued.

Following an increase in pension entitlements, the budget balance will deteriorate slightly over 2019-21 with fiscal policy otherwise broadly neutral. The authorities should let the automatic stabilisers operate and consider more active measures to further stimulate long-term growth. The government should address the sluggish productivity performance in business sectors by promoting more competition in services.

Growth has moderated

As confidence of manufacturing firms has fallen sharply, business investment growth has slowed. The strong slowdown in major export markets has also reduced export growth. However, recent sentiment indicators suggest that the construction and service sectors remain resilient. Long-term unemployment is finally edging down. The tight labour market has supported wage growth and domestic demand.

Labour market and external demand: Austria

Source: OECD Economic Outlook 106 database.

Statlink

Austria: Demand, output and prices

Statlink

Policy measures should address still high labour taxes and boost productivity through structural reforms

The authorities need to make the revenue structure of the general government more growth-friendly and more conducive to social inclusion, for example by further reducing labour taxes on low‑income earners and finance it with green taxes. The new government can also help to strength fiscal sustainability by improving the cost-efficiency of public services by better exploiting economies of scale and harmonising spending and taxing powers across Federal, Länder and local governments. High-quality independent public spending reviews could further help to improve the design and delivery of public services. In order to alleviate pressures from population ageing, the government should aim to lift the average effective retirement age.

To better leverage productivity gains from digitalisation, remaining barriers to competition in service sectors and in digital trade and investment should be reduced. The quantity and quality of life-long learning programmes in digital technologies could also be enhanced by involving employer organisations more directly in the design and administration of such programmes. Ensuring sufficient provision of equity capital for young and innovative firms would help them to scale up and strengthen business dynamism. Tackling the gender gaps in career opportunities and salaries by making high-quality childcare and full-day schooling a legal entitlement in the whole country would help to make growth more inclusive. Strengthening German language learning opportunities could help to better integrate low‑skilled migrants and refugees and their families.

Uncertainty over trade is a downside risk for the export-driven economy

Output growth is set to be broadly stable at around 1.3% in 2020-21. Household consumption will remain the key driver of the expansion, as the weak external environment weighs on exports. Investment will slow as well, even though financial conditions are still favourable. Employment growth is projected to continue, albeit at a slower pace, stabilising the unemployment rate at around 4.6%.

Given the strong ties with the German car manufacturing industry and general high involvement in global value chains, Austria would be exposed to a more prolonged and deeper economic weakness than currently projected for Germany and the euro area. Exports and investment may surprise on the upside if trade disputes and uncertainty dissipate.