Country Risk Rating

A2
The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average. - Source: Coface

Business Climate Rating

A1
The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

 

  • Industrial and tertiary diversification; high added value
  • Comfortable current account surplus
  • More than 30% of energy sourced from renewable supplies
  • Major tourist destination (11th in the world)
  • High public expenditure on R&D (3% of GDP)

 

Weaknesses

 

  • Dependent on the German and Central/Eastern European economies
  • Banking sector exposed to Central, Eastern, and South-Eastern European countries
  • Multiple layers of power and administration (federal, Länder, municipalities)

 

Current Trends

Gradual recovery of growth

The Austrian economy entered a deep recession in 2020 because of COVID-19. The country, which has been affected by the pandemic since March, implemented strict lockdown measures to limit the health consequences, but these have impacted the economy. Like most European countries, Austria then faced the second wave in the autumn, further slowing economic growth in 2020. In 2021, the conditions for an economic recovery seem to be in place, but could again be disrupted. Indeed, the virus is continuing to circulate actively on the European continent and the possibility of a third wave remains. Thus, travel restrictions are expected to continue to weigh on the country in early 2021, and recovery is expected to be slow and gradual.

Austria has been mainly affected by the decline in household consumption, the driving force of its economy (52% of GDP), which has been considerably reduced because of the economic crisis that has led to an increase in unemployment (10% in 2020 compared to 7.4% in 2019) and a drop in income. In order to limit the impact on households, the government, supported by the ECB, has put in place a budget support plan amounting to 13% of GDP. In addition to aid allocated to the medical sector and businesses, the plan includes assistance for households, such as, for instance, deferring the payment of social security contributions and debt servicing, short-time work, and the reduction from 25 to 20% of the first bracket of income tax, retroactive to January 2020. Part of this aid has been extended until March 2021, which is expected to stimulate household consumption this year. However, consumption will remain below its pre-crisis level due to a still high household savings rate. Households are expected to continue to consume cautiously.

Furthermore, Austria is affected by the decline in tourism receipts, which account for 15% of GDP. Indeed, lockdown measures and border closures during the second wave prolonged the mobility crisis and had a significant impact on winter tourism. The government has allocated significant financial assistance, especially since tourism is not expected to resume before the spring of 2021, as the virus is still circulating.

Investment (24% of GDP in 2019), hitherto dynamic in all segments, has reduced sharply in 2020 due to COVID-19, except for the public sector, as the budget plan includes a sum dedicated to the latter, mainly in the healthcare system, climate and digital segments. In 2021, investment is expected to resume, but only slightly for housing and research and development, with the public component maintaining its pace. FDI (2.4% of total investment) has also contracted because of COVID-19. In 2021, it is expected to remain low, as economic uncertainties will persist.

Decrease in the public deficit and maintenance of the current account surplus

The traditional public surplus turned into a deep deficit in 2020, following the increase in government spending to cope with the crisis in the context of declining revenues. Indeed, the recovery plan is consequent and concerns many actors and economic sectors in the country. In 2021, the deficit is expected to decline due to gradual fiscal adjustments but will remain substantial due to the extension of certain support measures. The decline in public debt has slowed sharply because of the deficit in 2020. Its reduction will resume in 2021.

The current account surplus shrank in 2020 as a result of the sharp decline in the services surplus linked to the decline in tourism. The trade surplus has changed little, since the significant decline in exports (mainly automotive, electrical and electronic equipment, steel, wood and paper, pharmaceuticals, machinery) was offset by the concomitant reduction in domestic demand and, thus, imports. Remittances from foreign workers continued to sustain the high deficit in secondary income, while the investment income balance remained in balance with an equivalent decline in the proceeds of Austrian investments abroad and foreign investments in the country. In 2021, the current account balance will be close to its pre-crisis level, due to the recovery of international trade, even if constrained by the moderate recovery of the main European partners and a partial recovery in tourism. Recurrent surpluses have given Austria an external credit position.

Coalition government between the ÖVP and the Green

Early elections were held in September 2019, following which the ÖVP, the conservative Christian Democratic Party, once again became the largest party (37.5% of the vote). It began negotiations to form a coalition with the Greens, who came fourth. In January 2020, ÖVP and the Greens reached an agreement to form a coalition government. They have 71 and 26 seats out of 183 in the Nationalrat (Lower House), respectively. Mr. Kurz, leader of the ÖVP, remained Chancellor. The two parties are very disparate and are likely to make compromises, particularly on immigration and climate. Kurz's options were limited because the other two major parties, the Social Democratic Party (SPÖ) and the nationalist FPÖ, had withdrawn from the preliminary talks and regional governors belonging to the ÖVP, which has significant influence in that party, supported an ÖVP-Green partnership. However, the inexperience of the Green ministers and the significant influence of the ÖVP could hamper the effectiveness of the government.

Source:

Coface (02/2021)
Austria