OECD Economic Outlook, Volume 2021 Issue 2

Austria

The new lockdown will temporarily weigh on activity, but GDP is projected to recover quickly, growing by 4.6% in 2022 and 2.5% in 2023. A significant rebound in global trade underpins investment growth. Private consumption is expanding as households lower their saving ratio. Supply bottlenecks and labour shortages are weighing on activity. The outlook remains highly uncertain and dependent on the evolution of the pandemic and the length of the new lockdown, especially in hospitality sectors. Inflation is projected to increase to around 3% in 2021 and 2022 but will moderate over 2023.

The authorities should adjust support measures as sanitary conditions evolve. They should use the remaining fiscal space to facilitate post-pandemic structural changes, such as reducing the employment costs of the long-term unemployed and bolstering childcare services. A carbon tax will be phased in from mid-2022 accompanied by cuts in the personal and corporate income tax rates and various other measures. Business investment in green technology and digitalisation should continue to be incentivised.

The rebound in service sector activity has fuelled the expansion

Economic activity in the first three quarters of 2021 grew faster than expected. Following the gradual easing of sanitary and travel restrictions and progress with the vaccination campaign in the first half of 2021, output in service sectors severely hit by the pandemic rebounded. Shortages in input materials have put strong upward pressures on producer prices and are holding back a more buoyant increase of activity. Significant labour shortages have also emerged, but wage inflation has remained relatively benign so far. Consumer prices have risen by more than 3% in September and October 2021 compared to the previous year, largely driven by the transportation, energy and hospitality sectors. The sanitary situation has deteriorated since the end of the summer and both the number of people testing positive for the virus and hospitalisations have accelerated sharply in October and November. The authorities have announced a 20-day country-wide strict lockdown, starting on 22 November. Vaccinations against the virus will be mandatory after February 2022.

Austria: Economic activity, and public deficit and debt indicators

1. The pre-crisis growth path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation for 2022 and 2023 based on trend growth in 2021.

2. Maastricht definition.

Source: OECD Economic Outlook 106 and 110 databases.

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Austria: Demand, output and prices

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An ambitious tax reform is under way

The authorities started to adapt the COVID-19 support programmes from mid-2021 by withdrawing measures in sectors where conditions are normalising. Income support has been shifted to the standard social safety net. The primary budget deficit is expected to narrow over the projection horizon. While fiscal policy is tightening, grants of around EUR 3.5 billion from the Recovery and Resilience Facility will support further public investments, mostly in the areas of digitalisation and greening the economy, until 2026. An important tax reform, combining gradual increases in carbon prices with personal and corporate income tax cuts, has been sent to Parliament. Carbon emissions in sectors not covered by the EU Emissions Trading System (ETS) will be taxed at EUR 30 per tonne in 2022, rising to EUR 55 per tonne in 2025. The tax reform also foresees an increase in the family tax credit and child surplus, new incentives for investments and the so-called regional climate bonus, a compensation of the carbon tax burden for citizens living in more rural areas. The tax reform will be phased in gradually from mid-2022 to 2025 and is expected to benefit employment growth and corporate investment.

The new lockdown will likely lead to a temporary slowdown in activity

Private consumption will remain strong with households lowering their saving ratio. The rebound in global trade and the generous investment premium will continue to boost corporate investment. Labour markets will continue to improve. Supply bottlenecks, in particular in manufacturing and construction sectors, and skills shortages will however weigh on economic activity. Inflation is set to increase to around 3%. While supply bottlenecks are expected to fade by the latter half of 2022, wage negotiations are based on inflation rates over the last 12 months and will exert upward pressure on prices in 2022. A prolonged lockdown is a considerable downside risk to the projections. The ski tourism season is important for the economy, with February being the most important month for winter tourism in terms of overnight stays. An extension of the current lockdown into 2022 would jeopardise the winter season and have significant adverse effects on activity and employment.

Labour and skill shortages and ageing require better activation of labour resources

Plans to phase in carbon prices for sectors not covered by the ETS are welcome. Still, reaching the ambitious 2040 carbon neutrality goal will be difficult on the basis of current policies. Further cuts in greenhouse gas emissions will be needed, particularly in transportation, buildings and industrial sectors. Labour and skill shortages, and the ageing of the population call for new initiatives to better mobilise Austria’s large labour reserves, including the high proportions of partially or entirely inactive women and elderly workers. Ensuring the long-term sustainability of the pension system, e.g. by linking the retirement age to life expectancy and by reducing early retirement pathways, bolstering childcare and elderly care services to facilitate women’s labour force participation, and enhancing financial and workplace incentives to continue working at an older age, would be welcome.