IMF Executive Board Concludes 2021 Article IV Consultation with Austria

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

Austria entered the COVID-19 pandemic from a robust economic position with significant policy space. Nonetheless, the pandemic significantly impaired the economy as several lockdowns were implemented to help contain the spread of the virus. Real GDP declined by 6.3 percent in 2020 and contracted further in early 2021, driven by a sharp deceleration of private investment and consumption as well as a muted winter tourism season. The swift and sizable policy response to the pandemic has been effective in saving lives, protecting vulnerable households, and supporting workers and firms.

The economy is set to recover at a moderate pace in 2021, with growth projected at 3.5 percent. Economic activity is expected to accelerate from 2021Q2 as lockdowns were progressively lifted alongside fast progress in vaccinations. Growth is expected to accelerate to 4.5 percent in 2022 before stabilizing at its potential of around 1¾ percent in the medium term. Nonetheless, medium-term output is expected to remain below the pre-crisis trend. The outlook is subject to unusually high uncertainty, with near-term risks stemming from the unpredictable development of the pandemic, particularly from the threat of the delta variant and efficacy and extent of vaccinations.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Austria’s swift and effective policy response to the pandemic, but noted that the economic outlook appeared challenging, with the real GDP level likely to remain below its pre-COVID trend over the medium term.

Directors concurred that fiscal policy this year struck an appropriate balance between supporting hard-hit sectors and jump starting the economy. They agreed that fiscal policy should remain flexible given high uncertainty regarding pandemic developments. Directors commended Austria’s post-crisis priorities on digital and green transformation, and most Directors suggested that, as fiscal space remains, the authorities could consider additional spending to secure a faster and more sustainable recovery. In particular, measures could include further facilitating labor reallocation, reducing Austria’s high labor tax wedge, rehabilitating corporate balance sheets, and further fostering the green and digital transition, as well as mitigating economic scarring. A few Directors, however, considered that further stimulus to the recovering economy may not be warranted, particularly amid inflationary pressures driven by supply-side constraints.

Directors commended the resilience of the banking sector during the pandemic. Nonetheless, they stressed that emerging corporate vulnerabilities and housing market risks should be addressed to preserve financial sector stability. They recommended close monitoring of the impact of the pandemic on corporate and bank balance sheets, providing solvency support to viable firms, and imposing binding lending limits to contain housing market risks. Directors also encouraged swift implementation of the recommendations to strengthen supervision of less significant financial institutions and continued effort on improving effectiveness of the AML/CFT framework.

Directors noted the uneven impact of the pandemic across workers and regions notwithstanding effective utilization of the short-term work scheme. They recommended more targeted measures for those disproportionately affected by the crisis, and job creation measures to support the reallocation of workers and to address regional and skill mismatches such as language training, hiring subsidies, and relocation grants.

Directors welcomed the authorities’ ambitious plans for a green transformation, and noted that additional measures are necessary to bring Austria closer to its climate goals. They recommended a phased introduction of carbon prices, using the revenue raised to compensate low-income and vulnerable households and to support other key reform priorities. Directors also encouraged adopting green budgeting practices to integrate climate considerations into the government’s fiscal frameworks.