Economy and Trade
Austria’s economy is closely tied to the other European Union nations, and especially to the German economy. It comprises a large services sector, a sound industrial sector, and a small, but highly developed agricultural sector. The country, which has been a member of the EU’s Economic and Monetary Union since 1999, has not escaped the global economic downturn and entered a recession in 2008 that is expected to persist through most, if not all, of 2009. Prior to this, the country had enjoyed several years of solid demand for its exports and benefited from record employment growth in the first half of 2008. The Austrian economy has benefited greatly in the last decade from strong commercial relations, with central, eastern, and south-eastern Europe, especially in the banking and insurance sectors. However, the Austrian banking sector was hard hit by the recent international financial instabilities, and some of Austria’s largest banks have required government support. The country faces a severe challenge in the future, even after the recession eases, as its ageing population and very low birth rate threaten to exacerbate labor and skills shortages in key sectors of the economy, such as manufacturing and services.
Economic Policy over 12 Months
By February 2009, the growing recession in the eurozone had forced the Austrian government, under the leadership of Chancellor Werner Faymann, to introduce not one but three stimulus packages. The coalition government, consisting of the Social Democratic Party and the Austrian People’s Party, are more or less united on both the need for positive action and on the measures chosen. They have agreed, for example, to bring forward income tax reform, from 2010 to 2009, and the three stimulus packages have been pushed through swiftly, all aimed at shoring up liquidity in Austria’s financial industry.
However, Austria’s banks are heavily exposed to counterparty risk from banks in central and eastern Europe, where Austrian banks have loans outstanding which amount to some 70% of the country’s GDP. Austria is working with other European countries, including Italy, Germany, France and Belgium, and with the European Investment Bank, the European Central Bank, the European Bank for Reconstruction and Development, the EU Cohesion Fund and the IMF to create a sufficient rescue package for the banking sectors in central and eastern Europe, according to both The Economist and the IMF.
Austria is committed to a prudent fiscal policy and has a target of running a balanced, sustainable budget. However, the cost of the various stimulus packages it is funding, both within and without its borders, is already creating a budget deficit that the country will find challenging in the immediate future. However, Austria has benefited, and will continue to benefit, from having introduced measures to deal with the costs associated with an ageing population, including pension, health, and long-term care costs.
In its most recent country review (June 2008), the IMF urged Austria to “re-balance and broaden” its tax base by shifting the burden of taxation away from work and entrepreneurship to fixed assets such as real estate. It has also suggested Austria can do more to implement environmental taxes and to add or raise excise duties on some, potentially harmful, consumer items such as tobacco and alcohol.
As a small, open economy, Austria needs to ensure that it is constantly reforming its processes and structures to encourage business to flourish, according to the IMF. The fact that the country’s demographics are heavily weighted towards older people means that there is a chronic shortage of skills and available manpower across many Austrian industrial sectors. Yet the country is becoming considerably less open to foreign workers than it was several years earlier.
Economic Performance over 12 Months
Much of Austria’s effort in recent months has gone on trying to soften the impact of the global downturn on the country’s economy. Austrian enterprises, in particular Austria’s banks, are among the largest investors in eastern and south-eastern Europe, with some Austrian banks being market-leading in these areas.
According to the IMF, Austria’s 2008 budget deficit was lower than expected, at around 0.3% of GDP, instead of the anticipated deficit of 0.7%. The country’s external debt, however, stood at 62.5% after the Austrian government’s eastern European banking bail-out package. This is 2.5% above the limits set by the Maastricht Treaty.
Not surprisingly, the downturn, though it was slow in coming, has begun to take its toll on jobs, and unemployment increased significantly in the last quarter of 2008 and in January 2009. This reversed a trend in 2008 where employment had been growing at a rate of 1.6%. Currently, the automotive sector is the worst hit, but job-cutting is starting to spread to other sectors too.
By the end of January 2009, the country’s jobless total had risen to 301,529, some 12.2% more than in December. The jobless total contained a disproportionate number of young workers, with a 22.9% rise in this category. Austria has also continued to implement measures to increase the employment of older workers and to tackle what the European Union calls “gender segregation” within the labor market.
On the positive side, Austria has moved up the European Union’s “innovation rankings,” a useful guide to an economy’s ability to create new jobs and to achieve significant market share in emerging industries. It has climbed from eighth place and now ranks sixth in the European Union, according to the European Innovation Scoreboard 2008. Austria is also second behind Ireland as the country with the fastest improvement rate in the innovation stakes.
Headline inflation was touching 4% by mid-2008, but the deflationary impact of the recession, falling global commodity prices, and lower real interest rates have caused inflation to ease back.
The IMF argues that the Austrian government’s key mid-term challenge will be to find ways of transforming the country into a more knowledge-intensive one, better suited to an ageing but highly literate population. Despite increased spending by Austrian businesses on R&D and innovation, the country is still some distance away from achieving this goal.
Support for Inward Investment and Imports
ABA-Invest in Austria is a government-operated consulting firm which aims to be the international investor’s first business address in Austria. The ABA provides advice and services ranging from issues on incentives, to market opportunities and tax concerns.
Tax Exemptions
The country has a moderate corporate tax rate of 25% and offers attractive research incentives (contact ABA-Invest for details). Tax incentives are linked to training, research, and “invention” (innovation).
Statistics
GDP growth: 2.1% (2008), 0.3% (2009 IMF est.)
GDP per capita: $39,600
CPI: 3.7% (2008)
Key interest rate: 6.3%
Exchange rate versus dollar: euro/dollar rate
FDI: US$276.9 billion
Current account deficit/surplus: 0.3% (2008, IMF)
Population: 8,205,533
Source: CIA World Factbook except where stated
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