Austria on path to a greener economy

Going into the Covid-19 pandemic, Austria was on a strong footing, with growth above the eurozone average and unemployment rates falling. Public debt was also on the decline.

In 2020, the Austrian economy contracted by 6.6%, roughly in line with the eurozone average, according to Statistics Austria, the country’s official statistics office. However, economic recovery in 2021 is expected to be more sluggish than the rest of the eurozone, due to the weak performance of the tourism sector. Fitch Ratings forecasts growth of 2.5%, compared to 4.7% for the region, with Austria’s economic output only reaching pre-pandemic levels in early 2023.

“In Austria and Germany, the manufacturing sector is experiencing a pronounced recovery on the back of the revival of international trade. However, the lockdown during the first quarter and various safety measures during the first six months of 2021 still weigh on tourism, hospitality services and retail trade,” says Enver Sirucic, chief financial officer (CFO) and deputy chief executive at Bawag Group, Austria’s fifth-largest lender by Tier 1 capital.

Revenue down

Extensive government support has played a significant role in dampening the economic shock caused by the pandemic, especially for small and medium-sized enterprises (SMEs), at the same time as curbing unemployment. Unemployment in Austria rose in the early stage of the pandemic; however, job losses were limited by government relief measures, and recent figures showed unemployment to be almost flat at around 7.7% in August.

Austria recorded fiscal surpluses in both 2018 and 2019, which gave the country a firm standing to pump money into the economy when the pandemic hit. The country spent the equivalent of 13% of its gross domestic product (GDP) on pandemic-related economic support measures in 2020, with the budget deficit reaching 8.9% of GDP at year-end — far higher than the peak deficit during the global financial crisis a decade ago. The budget deficit is expected to remain high in both 2021 and 2022, given continued economic support for businesses and individuals.

In April, the Austrian government dropped its forecast for tax revenues for 2021, while also increasing the projected amount of public spending. The Austrian Ministry of Finance expects public spending to reach €97.4bn this year — with tax revenue €2.6bn lower than previously expected, at €72.5bn — and the general government debt ratio to rise by 1.7% to 89.6% of GDP.

Despite the rising debt ratio, Austria continues to have one of the highest credit ratings in the EU and has been able to continue to borrow cheaply, through the likes of issuing ultra-long-term government bonds. In June 2020, the country sold a 100-year bond at a yield of 0.88%, after issuing a similarly long-term bond in 2017, with a yield of more than 2%.

Economic turmoil

Tourism remains the most vulnerable sector of the Austrian economy, as the pandemic hit both the summer and winter tourist seasons in 2020 and continues to have a strong impact.

“The outbreak of the pandemic and the associated lockdowns have caused revenue shortfalls for many companies in the tourism and leisure sector,” says Gerda Holzinger-Burgstaller, chief executive and CFO at Erste Bank, one of Austria’s largest lenders.

The equity ratio in these industries was already one of the lowest compared with other industries before the crisis, she adds, with SMEs from the tourism and leisure sector having a pre-pandemic median equity ratio of 14% of total capital, compared to an average equity ratio for the commercial economy of 26%. “Around one-third of SMEs in the tourism and leisure industry have a negative equity ratio,” Ms Holzinger-Burgstaller says.

These sectors have not been helped by the uncertainty caused by the multiple lockdowns imposed by the Austrian government throughout 2020 and 2021.

“For the domestic economy, it’s been more challenging this lockdown, lockdown reversal, going back into lockdown, than maybe having a slightly higher level of restrictiveness but on a constant level,” says Gunter Deuber, head of research at Raiffeisen Bank International (RBI). “This contributed to an underperformance, and we definitely have some issues on the tourism side, but this was less an issue than expected because of domestic tourism in summer,” he adds.

RBI is now predicting GDP growth of 4.5% for the Austrian economy in 2021 and 2022, Mr Deuber says.

Stuttering recovery

Economic growth in Austria in the second quarter of 2021 was up 3.6% quarter-on-quarter, significantly higher than the euro area average of 2.2%, according to the Austrian Institute of Economic Research (Wifo). This was mainly due to buoyant momentum in the hospitality sector, while both unemployment and long-term unemployment have been trending downwards.

“It was surprising, especially the strong rebound in the hospitality sector,” says Stefan Schiman, a senior economist at Wifo, who points out that half of the growth was due to the hospitality sector.

Stefan Schiman, Wifo

However, Mr Schiman says that Wifo’s latest economic indicators show a slowing down of growth. “Over the course of the summer, GDP went above its pre-crisis level — above the average of 2019 — peaking in early August at 1.5% above pre-crisis GDP. The momentum is slowing currently, especially in the service sector. This fits with our sentiment indicators, which show that, especially in the sectors that are most vulnerable to [the pandemic], their sentiment is going down rapidly. Optimism is going down.”

In the early months of the pandemic, private consumption and the export sector took a big hit, dropping 16.6% and 22.9% year-on-year, respectively. However, investment showed growth from the fourth-quarter of 2020, with construction investment being one of the first to recover.

“It’s really supply bottlenecks that are a problem for many companies, not only concerning material, but also qualified labour,” adds Mr Schiman.

With the Austrian economy recovering, support measures are gradually being phased out, which is likely to have some short-term impact on employment and economic growth.

Pumping money into green

At the same time, Austria’s recovery and resilience plan — part of the EU-wide pandemic recovery programme that is pumping billions of euros into member state economies — is heavily focused on the new economy, with roughly 59% of total money allocated to reforms and investments supporting climate objectives, as well as 53% for digital objectives. Those numbers are far higher than the European Commission’s stated targets, which were 37% and 20%, respectively, and points to Austria’s long-term commitment to the green transition.

Much of the money has been earmarked for transportation, including the transition to electric vehicles and rail networks, with measures also introduced to promote green technologies, such as investment incentives and preferential tax rates for low- or zero-emission products.

“I think, overall, Austria is well positioned here,” says RBI’s Mr Deuber. “We’re latecomers in certain aspects — [for example] Germany has a carbon dioxide emission tax already. The Austrian government is targeting an international green bond issuance next year, [while] Germany and the Netherlands are already in the market. I think we could have been a little bit earlier here,” he says, but adds that “the potential is there, especially if you look at our energy mix — we have a very green energy mix”.

Others are also optimistic that Austria can thrive in this new, greener economy. “Even if it often doesn’t seem like it, Austria’s economy is quite well positioned when it comes to start-ups, SMEs and clean energy,” says Robert Zadrazil, CEO of UniCredit Bank Austria. “What is missing is a broadly rooted stock market culture that can support these companies in their growth phase.”

Mr Zadrazil points out that the share of bank loans in corporate financing in Austria, at around 20%, is significantly higher than the eurozone average of 12% or 2% in the US. “So, there is not necessarily a lack of entrepreneurial energy, but rather a lack of entrepreneurial risk-taking, also on the part of investors,” he adds.

In the short term, Austria’s economy is still likely to feel the effects of the global pandemic, which could be far from over. “I think it will go in the direction that there will be again a drag on the economy in the fourth quarter, due to the next coronavirus wave,” says Mr Schiman.

“The third quarter this year still seems to be very strong, but we see this momentum slowing and we think it will slow further in September — and then even further in the coming months. And then there will be again a quite strong rebound next year,” he adds.

Continue reading: Austrian banks maintain their durability