Austria: Risk Assessment
Country Risk Rating
Business Climate Rating
- 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 (11th in the world)
- High public expenditure on R&D (3% of GDP)
- 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)
Growth weakened by the external environment
Austrian economic growth is expected to slow slightly in 2020. Household consumption (52% of GDP) remains a growth driver, supported by fiscal measures (including a number of tax cuts). Its acceleration was already perceived last year with decreasing unemployment, growing wages and from a tax cut for families (Familienbonus, or “the family bonus”). However, last year’s surge in construction is not likely to be extended to 2020. Although favorable financing conditions still support demand for housing, fixed asset investment (24% of GDP) will slow down amid lower economic growth.
On the industrial side, the weakness of the main trading partner, Germany, and slower global demand result in a deteriorated business sentiment with purchasing managers’ index (PMI) dropping to its lowest level in seven years in September 2019. The slowdown has already affected manufacturing industries, including automotive and sectors closely cooperating with it, i.e. machinery, chemicals, and metals. Therefore, export growth will be under pressure. However, Austria’s links to Central and Eastern Europe could partly compensate for the negative effects of the global slowdown, as the CEE region still enjoys a relatively solid economic activity. Nevertheless, as slower investments will also limit the growth of imports, the net external balance contribution to GDP growth should remain positive.
The labor market remains favorable for households. The unemployment rate has continued to fall, reaching 4.5% in September 2019. As there is not much room for its further contraction, it is expected to stabilize in 2020. However, companies still report sizeable job vacancies, which are some of the highest in the European Union (the vacancy rate reached 3.0% in mid-2019 compared to 2.3% for the EU average). The tightness of the labor market is likely to ease in the course of 2020, in line with weaker demand for labor linked to decelerating economic activity.
Tiny budget surplus and decreasing public debt
The budget deficit is expected to show a tiny surplus this year. Admittedly, the wage tax and assessed income tax will be not as strong as last year facing weaker employment growth. Furthermore, a series of fiscal measures implemented last year will take a toll on budget figures in 2020. Therefore, the 2020 budget surplus is going to be lower but supported by taxes on the digital economy and measures against tax fraud. The public debt will continue its downward path.
The current account surplus decreased slightly in 2019 because of the slower growth of exports. Weaker foreign trade is likely to be perceived in 2020. However, the current account will be still supported by tourism revenues. Imports and exports alike will remain concentrated in the same sectors, namely machinery, transport, and chemicals. Income from Austrian investments abroad will balance profit remittances from foreign investments. As usual, the current account surplus will be absorbed by foreign investments, especially portfolio investments.
Coalition government of ÖVP and Greens
The Austrian People’s Party (ÖVP) – the conservative, Christian democrat party – won the October 2017 parliamentary elections with more than a third of the seats in the Nationalrat (Lower house). President Alexander Van der Bellen appointed Sebastian Kurz, former Minister of Foreign Affairs and leader of the ÖVP, as Chancellor. The coalition government consisted of the ÖVP and the far-right Freedom Party of Austria (FPÖ). However, Kurz’s government was ousted in a no-confidence vote after the Freedom Party’s leader, Heinz-Christian Strache, resigned as Vice-Chancellor in May 2019, after the emergence of a video that showed him promising government contracts in exchange for financial support from a woman claiming to be a wealthy Russian. In the snap election held in September 2019, the ÖVP emerged again as the largest party. It began coalition negotiations with the Greens, who finished fourth in the latest election. In January 2020 the ÖVP and the Greens reached a deal to form a coalition government. Mr. Kurz remained Chancellor. The new coalition of widely disparate parties is likely to compromise, especially on immigration and climate. Mr. Kurz’s coalition options were limited given the withdrawal from preliminary talks of the two larger opposition parties, the Social Democratic Party (SPÖ) and the FPÖ, as well as the support for an ÖVP-Green partnership among the ÖVP regional governors, who exert significant influence within the party.