With the containment of the spread of the COVID-19 pandemic and the associated relaxation of restrictions, economic life should become more dynamic again. In Austria, the first easing of constraints was already implemented after Easter, and a gradual lifting of closures in the retail, hotel and catering sectors by June was announced, provided that this would not fundamentally worsen the epidemiological indicators. Austria is (together with Denmark) the first European country that has – after four weeks of lockdown – already softened restrictions. Economic activity should therefore pick up slightly already over the course of the second quarter.
For 2021 a subdued rebound with economic growth of 3½ percent is anticipated. The pre-crisis level of real GDP will not be reached until late 2021 or early 2022.
Comprehensive fiscal measures are mitigating the economic impact of the COVID-19 pandemic on the labour force and businesses. Budget-effective expenditures of 12½ billion € – short-time working assistance for dependent employees, hardship and emergency funds for self-employed persons and companies – to cushion the decline in employment and household incomes are assumed. Together with the significant tax shortfalls, a general government deficit of 7½ percent of GDP is expected for 2020. For the years 2022 to 2024, economic growth is forecast to slow to +1½ percent and the government deficit to narrow to 1¼ percent of nominal GDP.
In a more pessimistic scenario, a steeper downturn in international economic activity in 2020 was assumed. Assuming that the support measures were extended in accordance with the government's "whatever it takes" announcement, GDP would fall by 7½ percent and employment by 2½ percent. The budget deficit would widen to 10 percent of GDP in this scenario.
The COVID-19 pandemic poses completely new challenges for economic research, since this combination of state-imposed production and demand cutbacks has never been seen before and empirical reference periods are therefore not available. In a situation in which the forecasting environment is subject to almost daily changes, it is simply not possible to make a serious assessment with conventional tools. For this reason, WIFO has developed a new instrument: the weekly WIFO GDP indicator. This new indicator uses economic data on a daily, weekly and monthly basis, which are available very timely, to estimate weekly GDP developments. Scenarios are simulated based on this model and various plausible assumptions regarding the further development of health and/or fiscal policy measures or the international economy.
As a result of the COVID-19 pandemic, the prospects for economic development in Austria this year are the worst since the end of the Second World War: WIFO considers a drop in economic output of more than 5 percent to be the most likely scenario (main variant). Thus, an economic contraction is expected that will even exceed the one resulting from the global financial and economic crisis in 2009 (–3.8 percent).
The deep recession is the result of a combination of several negative shocks from both the supply and the demand side. Adverse supply shocks comprise the mandatory closure of production facilities, shops, hotels and restaurants and the ban on the provision of almost all personal services. In addition, delays or failures in the provision of raw materials and intermediate products within international supply chains have a negative impact on production opportunities, particularly in the manufacturing industry.
The reduced income of persons in unemployment (unemployment benefits result in an average income replacement rate of 55 percent) or in short-time work, as well as the shortfall in revenue of self-employed persons during the imposed closures, lead to significant income losses. The restrictions on mobility and the reduced opportunities for consumption result in compulsory private household saving. Companies have difficulties with cancellations of existing orders or with the acquisition of new orders due to the low (international) demand. The fact that the COVID-19 pandemic has now spread to around three quarters of the world and countermeasures have been implemented almost synchronously in almost all countries gives rise to the most severe global recession since reliable economic statistics are available.
Due to the negative push and pull effects acting in the same direction, Austria's economic output will contract by 5¼ percent and employment by 1¾ percent in 2020. The much smaller decline in employment compared to GDP is due to the widespread recourse to short-time work: if this instrument did not exist and if surplus staff were dismissed after the reduction of overtime, the drop-in employment would be 2½ percentage points higher. Together with the support measures for self-employed and companies (emergency and hardship funds), budget-relevant subsidies amounting to around 12½ billion € are assumed. In addition, revenues from taxes and social security contributions are being reduced by the deferral of advance payments of taxes and social contributions. As a result of the slump in economic output, all tax and social contribution revenues will also decline via the automatic stabilisers. Taken together, this translates into a budget deficit of 7½ percent of GDP in 2020.
The picture drawn so far is quite gloomy, but there are some rays of hope. Austria has reacted comparatively promptly, and the population has generally followed the imposed restrictions as a necessary evil very strictly.
With the significant decline in the number of new infections and the still high levels of free capacity in intensive care, the federal government decided to relax the restrictions on supply (for small shops and DIY stores) after Easter, and thus earlier than generally expected. In accordance with the epidemiological indicators, the restrictions for retail, catering and hotel business as well as for the provision of personal services are to be eased gradually until June. This should result in a revival of economic activity as early as mid-April or early May – albeit at an initially low level due to spatial constraints. With the exception of restrictions on travel – especially in air travel – and for events where many people meet in (very) small spaces and where physical barriers prevent the necessary distances from being maintained (in the spectator areas of sporting events, festivals, concerts with standing room, clubs and discos), most limitations, although not lifted, should be relaxed significantly from the summer onwards.
Under these conditions and assuming that the spread of the epidemic remains under control, economic activity is expected to pick up from the third quarter onwards. This is also because the service sector, which was particularly affected by the restrictions, had been in comparatively good shape in the months prior to the crisis and thus had a stabilising effect on economic activity. Except for the hotel industry – and here above all city tourism, especially that in Vienna, where most foreign guests arrive by plane – the service sector should recover quickly again.
A problem for many businesses is the low level of equity and liquidity reserves. In particular, it is important to ensure that young companies and start-ups, which often have negative equity capital, are not at a disadvantage in the current distribution of state aid. Apart from this, however, the disbursement of resources from the hardship fund seems to have been very swift and unbureaucratic and the rapid exploitation (and augmentation) of the funds also signals a strong demand for this aid.
Given these conditions, WIFO expects economic growth of +3.5 percent in 2021, resulting in a significant decline in unemployment and new indebtedness (the fiscal aid measures to cushion the economic collateral damage from COVID-19 containment are limited in time and should only take effect or burden the public finances in 2020).
Although a better economic development than the above-mentioned cannot yet be completely excluded, the occurrence of an even
worse outcome than assumed in the main variant is much more likely than the realisation of a more favourable one. In a more
pessimistic scenario, a stronger weakening of economic performance is assumed for Austria's main trading partners. It is also
assumed that the public sector will remain true to the line it has taken so far and will expand its support measures for employees
and companies accordingly ("whatever it takes" assumption). In this scenario, economic output and employment would fall by
7½ percent and 2½ percent respectively in 2020, the unemployment rate would rise to 9.1 percent and the budget deficit to
some 10 percent of GDP.
