IMF Wraps 2025 Article IV Consultation With Austria

• Austria has experienced two successive years of recession under weak domestic and external demand, triggered by the energy price shock and subsequent euro area monetary tightening. Despite weak demand and some easing in labor market conditions, inflation at around 3 percent year-on-year still exceeds inflation in the euro area by about 1 percentage point, with sticky services inflation and the lapsing of energy price relief policies causing headline inflation to rise. The fiscal deficit widened to 4.7 percent of GDP in 2024 due to the weak economy, lagged effects of inflation, and one-off expenditures, among other factors, resulting in an increase in public debt to 81 percent of GDP.
• The growth outlook continues to remain weak for 2025, reflecting planned fiscal consolidation and heightened global trade barriers and trade policy uncertainty. A return to growth is expected from 2026 onwards, though the medium-term growth and fiscal outlook faces significant headwinds from demographic aging and sluggish productivity growth.
• The outlook is subject to risks in both directions. Downside risks to growth predominate, including from increased global trade policy uncertainty and protracted weak sentiment. Upside risks include a faster-than-expected rebound in private demand or easing of global trade tensions.

Washington, DC – [July 3, 2025]: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation26F ^[1] with Austria. The authorities have consented to the publication of the Staff Report prepared for this consultation.27F [2]

Executive Board Assessment28F ^[3]

Austria faces a challenging economic situation. Following two successive years of recession triggered by the energy-price shock and subsequent euro-area monetary tightening, the growth outlook remains weak for 2025, reflecting sizable planned fiscal consolidation and heightened global trade barriers and uncertainty. GDP is expected to recover more strongly from 2026 onwards under the baseline scenario. Nevertheless, the near-term outlook faces significant risks, including from global trade policy uncertainty and related uncertain financial conditions, which could affect economic sentiment and demand. Inflation in 2025Q1 still well exceeds the euro-area average and is only expected to close the gap gradually by end-2026. While Austria's external position in 2024 is assessed as broadly in line with the level implied by medium-term fundamentals and desired policy settings, Austria's competitiveness could be undermined over time if inflation convergence does not occur, which could happen if productivity-adjusted wage growth persistently exceeds the euro-area average. Moreover, headwinds from population aging and sluggish productivity growth will continue to constrain medium-term growth prospects, absent significant reforms. Major new fiscal adjustment measures are also needed over the medium term to put the debt ratio back on a downward path while offsetting rising spending pressures from aging, defense, the green transition, and interest payments.

The government's near-term fiscal consolidation measures will help reduce inflationary pressures and slow the rise in debt. The government's announced fiscal measures for 2025 are expected to lower the deficit and are sufficient for 2025 given the weak economy. If near-term downside risks materialize, the authorities should let automatic stabilizers operate freely to avoid an excessive drag on growth, with measures deployed to protect the most vulnerable in the event of a severe downturn.

A bold and well-designed package of consolidation measures can yield significant savings over the medium term. The authorities should aim to cut the deficit to below 2 percent of GDP to put the debt ratio on a declining path. To achieving this while offsetting rising spending pressures, the authorities could consider some combination of gradually reducing pension replacement rates, which are among the highest in the EU; limiting public-sector wage increases; increasing health-care spending efficiency; and eliminating environmentally harmful subsidies, along with greater reliance on property, inheritance, gift, and excise taxes—taxes that are all somewhat low in Austria compared to the European average. Gradually increasing the national carbon price could generate additional fiscal resources, help prepare for anticipated higher carbon prices under EU ETS2, and encourage efficient carbon mitigation in service of Austria's ambitious decarbonization goals.

Reforms to increase labor supply and reduce regulatory barriers could significantly boost medium and long-term growth. Boosting labor supply by narrowing the gap in full-time work by females and in labor force participation among elderly workers relative to the EU average could offset more than 20 years of demographic aging in terms of the effect on GDP. In this regard, ongoing efforts to provide more childcare are welcome and should be deepened by further expanding childcare and eldercare facilities, undertaking pension reforms that incentivize longer working lives, and continuing efforts to better integrate immigrants into the work force. The growth outlook could be further improved by stepping up efforts to cut red tape in services sectors where regulatory barriers remain high, speed the approval of renewable energy projects, and reduce regulatory bottlenecks in housing supply, including by easing land-use regulations. Measures to promote capital market finance for firms, especially equity financing for young firms at different stages of growth, could foster more innovation and entrepreneurship, as could ongoing efforts to strengthen ecosystems of collaboration between academia and industry.

Deepening the EU Single Market is also critical for improving Austria's productivity and economic growth. Intra-EU trade barriers remain significant. Reducing these barriers and deepening the EU Single Market, including through reforms such as Savings and Investment Union and the establishment of harmonized rules for businesses operating in different jurisdictions (i.e., creating and implementing a well-designed common 28th corporate regime) could allow firms to better leverage economies of scale and catalyze financing for innovative ideas. Further energy market integration within the EU would help reduce the level and variability of energy costs. Supporting such reforms is one of the most important steps that Austria could take to boost productivity and growth across both Austria and Europe.

The financial sector remains healthy and macroprudential policies are broadly appropriate, but continued vigilance on potential credit risks is warranted. Banks face potential credit risks, including from nonfinancial corporates affected by the rise in global trade barriers and trade policy uncertainty. To mitigate these risks and prepare for an expected normalization of bank profits from recent highs, the authorities should continue to encourage banks to value collateral conservatively, ensure adequate risk provisions, and remain prudent in profit distributions, including to build resilience to shocks and invest in infrastructure to safeguard against cyberthreats. Regarding the borrower-based measures for residential real estate lending, which are set to lapse in July 2025, the new government should consider legislation to adopt these measures as permanent instruments, as they are consistent with international standards for prudent underwriting. Meanwhile, supervisors should remain vigilant that banks adhere closely to the proposed lending guidelines that will replace the borrower-based measures. Regarding CRE risks, the introduction of the SSyRB set at 1 percent of CRE assets is welcome, and the authorities should continue their efforts to close macroprudential CRE data gaps. The current setting of the CCyB at zero remains appropriate given weak credit growth. Implementing key outstanding recommendations from IMF staff's 2020 Financial System Stability Assessment would further strengthen the framework for financial sector oversight and safety mechanisms.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the www.imf.org/Austria page.

[3] At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .