IMF Concludes 2022 Article IV Consultation with Austria

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Austria.

The Austrian economy recovered robustly from the pandemic. Swift and effective policy measures and a strong public health system helped cushion the impact of the pandemic, allowing real GDP to recover by 4.8 percent in 2021. However, the recovery lags somewhat compared to peers, partially due to the strong concentration of the winter tourism and hospitality sectors in Austrian GDP.

Austria is highly vulnerable to the fallout of Russia’s war in Ukraine given its high dependence on energy imports from Russia, deep integration into global value chains, and large banking exposures. Growth is projected to decline significantly during 2022:H2 and 2023 due to impacts of the war and the related energy crisis. Over the medium term, annual growth is projected to recover to around 1¾ percent. However, output will remain below the pre-crisis trend. Uncertainty is extraordinarily high with significant downside risks.

Executive Board Assessment [2]

The war in Ukraine constitutes another shock to the economy and has caused downside risks to rise considerably. Economic policies should aim at cushioning the impact of war, building resilience, and boosting growth.

The measures taken to address inflation concerns are temporary, but many are broad-based while some actions could undermine green transition efforts. Any additional support should allow full pass-through of international prices to consumers while providing more targeted and temporary transfers.

Austria’s contingency planning for a gas supply disruption is welcome but more is needed to safeguard medium-to-long-term energy security. This includes providing incentives for conservation and fuel switching, developing strategies to diversify gas supplies in coordination with EU partners, and accelerating domestic green energy production.

The eco-social reform is an important step in the green transition. Protection of vulnerable households is critical, but we advise against increasing broad-based compensation above the medium-term neutrality objective.

Personal income tax indexation will keep the labor tax wedge down and avoid an additional contractionary effect from higher inflation. However, together with the indexation of social benefits, the authorities now face significant rigidities in fiscal consolidation. Therefore, increased discretionary expenditure control will be required to achieve Austria’s deficit objectives. Additional spending should be targeted on increasing potential growth and promoting economic resilience, while safeguarding debt sustainability. Population aging will increase pension and health care costs while reducing contributions, reforms to address this increasing liability would be appropriate over the medium term.

The banking sector has weathered the pandemic well, but risks related to the Ukraine war warrant cautious monitoring of asset quality and enhanced supervision. To address financial sector risks from residential real estate prices, we welcome the plan to make binding the borrower-based measures, but more should be done if the overvaluation pressures persist. Additional capital-based macroprudential measures, such as a sectoral systemic risk buffer calibrated to real-estate exposure, should be considered if vulnerabilities persist.

Measures to reduce labor market mismatch and promote employment, such as re-skilling programs, language training and relocation assistance, as well as policies to boost old-age labor force participation, can alleviate Austria’s labor shortages. Measures to rapidly integrate refugees from Ukraine are welcome from both a humanitarian and economic perspective.

Accelerating the digital transition will help boost productivity and raise Austria’s growth potential. Such spending could also contribute to the green transition, as greater digital access can increase work-from-home options and online banking and commerce, which could lower transport needs, lowering fossil fuel consumption and greenhouse gas emissions.