Country Risk Rating

A1
The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very 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 and balanced government budget
  • More than 30% of energy sourced from renewable supplies
  • Major tourist destination (12th 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 (federation, Länder, municipalities)

Current Trends

Growth weakened by the external environment

Austrian economic growth is expected to mark time in 2019. Domestic demand will remain robust, thanks to lively private consumption, which will benefit notably from the increase in household disposable income resulting from a tax cut for families (Familienbonus, or “the family bonus”), as well as the resilience of investment, linked to sustained levels of business confidence and high production capacity utilisation (88.7% in the third quarter 2018). Nevertheless, external demand is expected to be more sluggish, which will affect manufacturing industry. This export-oriented sector could suffer, in particular, from the expected growth slowdown in Germany, the destination of 30% of Austrian exports. In this context, a possible escalation in protectionism would also hinder export growth. However, the services sector is expected to be more resilient, relying more heavily on domestic demand. The same will apply to construction, also helped by immigration, which will continue to boost Austrian real estate. Following the bank bailout that ended in October 2016, with the restructuring of HETA's debt, the banking sector will continue to recover, notably thanks to tighter capital and asset quality rules. Bank profitability should improve further in 2019, lifted by swelling demand for corporate financing and household mortgages.

In 2019, inflation is expected to remain stable, close to the ECB's 2% target and the European average. Domestic demand will continue to exert upward pressure on the price level, while the stabilization of oil prices should limit the increase.

Improving public and external accounts

The government will maintain its policy of improving the public accounts and is expected to achieve its objective of a balanced government budget in 2019. In fact, expenditure is not expected to increase significantly and its GDP share is forecast to decline. This will be achieved via limited growth in the public sector wage bill and efficiency gains within government, among other methods. Nevertheless, spending on research and development and technological equipment is set to increase. At the same time, revenues, mainly from taxes (27% of GDP in 2017), are expected to increase by more, leading to a further reduction in the public debt burden.

The current account surplus is expected to increase slightly in 2019 on the back of tourism revenues, evidenced by the surplus in the balance of services (2.8% of GDP in 2017). While the income surplus could improve, the goods balance – which was slightly positive in 2018 – will be hurt by domestic demand (which favours imports) and slower export growth. Imports and exports alike will remain concentrated in the same sectors, namely machinery, transport and chemicals. However, the current account surplus will be absorbed by foreign investments, especially in the form of portfolio investments (net flow equivalent to 5% of GDP in 2017).

Austria continues its shift to the right

The Austrian People's Party (ÔVP) – a conservative, Christian democrat party – won the October 2017 parliamentary elections with more than a third of the seats in the Nationalrat. Following these elections, President Alexander Van der Bellen appointed Sebastian Kurz, former Minister of Foreign Affairs and leader of the ÔVP, as Chancellor. At the age of 32, Mr Kurz leads his government, a coalition between the OVP and the Freedom Party of Austria (FPÔ). The rapprochement with this nationalist party and the rightward shift in immigration policy, in particular by cutting benefits for asylum seekers, are resonating in a country that saw substantial inflows of migrants during the 2015 migration crisis. Austria’s tightening of migration policy has led to disagreements with many EU countries. A new law (which is set to enter into force in 2019) to index family allowances to the standard of living in workers' home countries if they have left their children behind could create tensions, because it would contravene European law. However, the government remains pro-European and has ruled out a referendum on leaving the Union. Austria also held the Presidency of the European Council in the second half of 2018.

Source:

Coface (02/2019)
Austria