Executive Summary
Austria has faced the successive waves of the pandemic with varying degrees of intensity. The human toll has been significant, despite the large health care resources. The vaccination campaign reached 66% of the total population by mid-November 2021. Shortcomings in health literacy may have slowed down the vaccination campaign, confirming the importance of the 2015 Health Literacy Strategy. The restrictions on mobility have generally led to significant drops in economic activity, before a strong recovery through summer 2021 (Figure 1). This reflected, particularly in certain periods of the year, the large share of tourism in economic activity, which has also led to regional differences in the impacts of the pandemic.
Source: OECD (2021), OECD Economic Outlook: Statistics and Projections (database).
Economic policymakers reacted forcefully to the shock of the pandemic. They used the fiscal space made available by prudent fiscal management in the past, to implement a comprehensive support package. Austria’s direct fiscal transfers after the start of the pandemic, including the measures planned until 2023 will reach 15% of GDP, above the OECD and peer country averages (Figure 2). Public loans and guarantees have been used more sparingly. This approach has mitigated further increases in corporate debt and preserved corporate investment capacity. The generous short-time working scheme has retained up to 1.2 million jobs, roughly 20% of total private employment.
Accelerating vaccination rates and the lifting of restrictions have led to a very strong recovery in 2021, until the strong fourth wave late autumn. GDP has surpassed its pre-pandemic level in the 3rd quarter of 2021. Business investment is boosted by bold fiscal support, including from Next Generation EU funds (Table 1). Private consumption is rising as households are reducing their saving ratio. The labour market is tight, with vacancy rates edging up. Without the severe supply chain disruptions and labour shortages, the recovery would be even stronger. Against this backdrop consumer price inflation soared above 3% starting from August. The intensification of the 4th wave through Fall and the lock-down of the non-vaccinated from mid-November is nonetheless expected to slow down the economy.
House prices have surged, exacerbating related financial risks. The stock of housing loans is still low in international comparison but is expanding rapidly. Guidance issued by the Financial Market Stability Board for a prudent management have been complied with only partially.
The authorities should continue making fiscal support increasingly targeted to address post-pandemic supply bottlenecks and structural changes. Policymakers started to adapt the support programme from mid-2021 by withdrawing measures in areas where conditions are normalising. Income support has been shifted to the standard social safety net. Part of business supports are being phased out. An important “eco-social tax reform”, combining a carbon pricing trajectory between 2022-25 with social transfers and cuts in personal and corporate income tax rates, has been sent to Parliament.
Firms’ investment capacity would improve with a stronger equity basis. Debt leverage rose in several activities, in particular in tourism businesses. Tourism activities have a large weight in the economy and contribute significantly to employment and income generation in remote areas. Tourism businesses should regain their investment capacity in order to seize the new growth opportunities emerging after the pandemic.
The corporate financing bias towards retained earnings and bank loans should not hold up investments. Incentivising financing with external equity through the tax system would complement the otherwise successful banking model. Stronger corporate balance sheets would facilitate long-term investments and the post-pandemic technological and industrial restructurings.
Labour and skill shortages are holding up the recovery. They have been amplified as some immigrant workers have durably returned to their home country during the pandemic. These shortages invite new policy and business initiatives to better mobilise Austria’s large labour reserves, including the high proportions of partially or entirely inactive women and elderly workers. Supports to the upskilling and employment of low-skilled workers, and to the tourism and hospitality sectors impeded by the fourth wave continue.
Policy frameworks and business practices that make the majority of women and of the healthy seniors participate only partially weigh also on long-term potential growth. Population ageing will be reflected in a decline in the share of the working-age population from around 76% of the total population in 2020 to 69% in 2060, intensifying pressures on labour markets. Facilitating the participation of female and older workers, including by promoting more attractive work organisations and workplaces, would help strengthen labour supply.
Training and investment needs to support climate transition and digitalisation, combined with population ageing, will put pressure on public finances. The share of public spending in GDP is already high. Additional demands for public investment and expenditure will require new prioritisation procedures to protect fiscal sustainability, including through a strengthened medium-term expenditure framework at general government level.
Assertive action is needed to reduce the carbon intensity of the economy which has failed to decline in the most recent years and to make progress toward zero net emissions by 2040. Plans to phase in carbon prices starting from 2022 are welcome. Reaching the ambitious 2040 goal – 10 years before the EU target date – will nevertheless be difficult on the basis of current policies. Additional greenhouse gas emission cuts will be needed across all sectors. The potential is particularly large in transportation, buildings and industrial processes. New emission regulations will need to be introduced, carbon prices will need to be increased and harmonised further, and R&D for emission-saving innovations will need to be boosted.
More rigorous climate policies would have substantial distributional impacts. The users of carbon-intensive goods and services (including fossil fuel cars and poorly insulated houses) would be strongly affected. Compensation for low-income households would need to be combined with forward-looking disclosure of the intended regulatory and price changes for after 2025, to improve medium-term predictability and help firms and households to adjust well in advance.
The pandemic has exacerbated labour market vulnerabilities. Long-term unemployment soared during the pandemic, although from a relatively low rate, before declining partially. Skill mismatches have increased in all regions. The ongoing and expected acceleration of automation amplifies the employability challenge. Up-skilling the low-skilled and the long-term unemployed should be key priority to avoid long-lasting scars on labour markets. There is room for improving the quality and labour market relevance of life-long learning programmes.
The pandemic has amplified gender gaps. The double burden of work and care obligations affected women, in particular women teleworking from home, more than men. The proportion of women working in severely hit sectors was higher, resulting in sharper declines of their work hours and incomes. Child care services need to be quantitatively and qualitatively improved to allow mothers to work full-time. Adapting work organisations and rebalancing parental leaves between mothers and fathers would help transform the deeply rooted male breadwinner model. Recent gender balance-friendly reforms in the public sector may stimulate further progress in the private sector.
Source: Eurostat (2021), Labour Force Survey Statistics.
Workers with non-standard contracts have suffered most during the pandemic. The free-lancers and the self-employed have endured severe income losses. Their protection against systemic shocks appeared inadequate according to social protection standards prevailing in Austria. Promoting free-lance work would boost business dynamism, job creation and the training of apprentices.
While the level of productivity is high, its growth has been disappointing since the Global Financial Crisis, as in many other OECD countries. Productivity growth in services has been one of the weakest across the OECD area over the past decade. While preserving high standards of service and consumer safety should remain a priority, fostering competition in all service activities would help to foster much-need productivity gains.
Reallocating resources across firms and sectors will be key for boosting productivity. In the past, Austria’s high level of productivity has largely resulted from gains within firms and sectors rather than on productivity-enhancing reallocations across activities. While the entry rates of new firms have been on an upward trend, the relatively low overall business dynamism slowed down the diffusion of new technologies and weighed on productivity growth. The share of total employment in young firms remains low. In addition to product market regulations conducive to entrepreneurship, deeper markets for venture and equity capital would provide a more fertile soil for start-ups and young firms.
Innovative activity is not diversified enough across sectors. Austria succeeded in bringing national R&D expenditures above 3% of GDP. Compared to other OECD countries, R&D intensity is higher in traditional and already competitive industries, but lags behind innovation leaders in high-tech sectors. Public support for business R&D is generous compared with other OECD countries and is mainly provided through tax incentives. R&D grants may better support longer-term and risky investments. A better balanced support structure would help to invigorate Austria’s activity portfolio.
Austria was less digitalised than peer countries before the pandemic. Entry rates in ICT services were among the lowest in the OECD. The pandemic gave a boost to digitalisation in business enterprises, to teleworking and to digital interactions, including with government agencies. The authorities should leverage this push further.
Source: European Commission (2021), Digital Economy and Society Index.
High-speed broadband coverage is lower than in most other European countries. Low-hanging fruits in deploying high-speed broadband appear to have been exploited. High capacity mobile technologies can offer alternatives to fiber infrastructures in low-density rural and mountain areas but they are not yet fully mature. The government’s commitment to give access to Gigabit connectivity to all Austrian households by 2030, including via public-private partnerships in geographical areas where commercial incentives are not strong, is welcome.