Economy and Trade
Austria’s economy is closely tied to the other EU 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 European Union’s Economic and Monetary Union (EMU) since 1999, entered a recession in 2008 and the economy contracted by 3.6% in 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 southeastern Europe, especially in the banking and insurance sectors. However, the Austrian banking sector was hard hit by the global financial crisis, 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
Austria’s open economy started to slow down in 2008. The government introduced a generous stimulus package, consisting mostly of lasting tax cuts, in order to offset the downturn and this has led to government deficits and a rise in public debt. The Austrian banking system was strongly exposed to central, eastern, and southeastern Europe and the authorities implemented a large banking stabilization package, including public capital injections and guarantees.
In September 2008, the authorities passed a stimulus package that envisaged a fiscal impulse of 0.3% of GDP in 2008 and additional stimulus in 2009–10. The 2009–10 budget includes a stimulus package of 1.5% of GDP in 2009 and an additional 0.4% of GDP in 2010. The fiscal measures were largely composed of personal income tax cuts. Public investment accounted for less than 5% of the package. More than half of the total stimulus for 2009 was accounted for by tax reforms that had originally been planned for 2010 and were brought forward to 2009.
Restoring the public finances to health when the economic recovery is fully underway will be the most pressing challenge facing the government. Under current policies, deficits are projected to be above the Maastricht target of 3% of GDP for some years; this compares with medium-term deficit projections of 1% of GDP that formed the basis for earlier long-term projections. Furthermore, the International Monetary Fund (IMF) has warned that unless fiscal deficits are reduced to below 1% of GDP by the middle of the next decade, the stock of debt could rise above 300% of GDP by 2050.
Since joining the eurozone on January 1, 2002, Austria has ceded control of its monetary policy to the European Central Bank (ECB). As one of the smaller economies in the eurozone, Austria is unlikely to have much, if any, influence over the ECB’s policy decisions. Thus, fiscal policy has assumed greater importance, since Austria no longer has the option of devaluing its currency to boost competitiveness.
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 toward 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
The economy started shrinking in the fourth quarter of 2008 as the global financial crisis intensified and world trade fell sharply. This process accelerated in the first quarter of 2009, with exports of goods declining by roughly a quarter compared with 2008. In the fourth quarter, the Austrian economy expanded by 0.4%, following 0.5% growth in the third quarter, when it exited recession. Over the course of the year, the economy contracted by 3.6%.
Unsurprisingly given the fiscal stimulus measures, rising unemployment, and a drop in the personal income tax and corporate tax rates, the fiscal deficit widened significantly in 2009, reaching 3.4% of GDP, compared to just 0.4% in 2008. Meanwhile, Austria’s national debt reached €184.1 billion, 66.5% of GDP, in 2009, up 3.9 percentage points on 2008.
Unemployment rose to 7.2% in 2009 from 5.8% in 2008, and in March 2010 the head of Austria’s Public Employment Service warned that the jobless rate would not peak until January 2011. The numbers out of work reached a post-war high in early 2010. Unemployment has not risen as steeply as in other EU countries, partly because the government has subsidized reduced working hour schemes to allow companies to retain employees.
The current account deficit narrowed in 2009 to an estimated 2% of GDP, down from 3.2% in 2008, despite a wider trade deficit. Exports slid 19.9% in 2009, while imports fell by 18.2%. Austria’s economy is tied closely to Germany’s—which consumes a third of its exports—and by rising trade with emerging Europe. Exports to the former communist part of Europe have risen to about a quarter of all exports. Hence the country’s foreign trade flows were particularly badly hit by the sharp contraction seen in German and emerging Europe in 2009.
There were signs that the economic outlook was improving in early 2010. In March, output and new business increased at the strongest rates since April 2006 and November 2006 respectively. The pace of job cuts slowed for the ninth month running, while stocks of purchases were broadly unchanged following an 18-month period of decline.
However, input cost inflation surged in March, and remained steeper than the long-run series average. The increase in input prices—the fastest since August 2008—largely reflected higher raw material costs, with respondents noting shortages at suppliers.
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: −3.6% (official, 2009)
GDP per capita: US$39,400 (2009 est.)
Unemployment: 7.2% (official, 2009)
CPI: 0.4% (2009 est.)
Key interest rate: 6.82% (December 31, 2008)
Exchange rate versus US dollar: €0.7338 (2009)
FDI: US$171.5 billion (December 31, 2009 est.)
Current account deficit/surplus: 2% (IMF, 2009)
Population: 8,214,160 (July 2010 est.)
Source: CIA World Factbook except where stated
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