Previously hidden problems are coming to the fore due to the Covid pandemic and the war in Ukraine, consulter Deloitte says.
The “Deloitte Radar 2022” study took a close look at the mood among Austrian companies. The results clearly show that the country is only in the midfield in most of the areas surveyed. In the significant “World Competitiveness Index”, Austria was only in 11th place in Europe, and in the “Global Innovation Index” and the “World Happiness Report” of the United Nations, Austria ranked 10th – de facto in the last third. Deloitte CEO Harald Breit explains what politicians should heed in order to improve the situation.
How many respondents took part in the Deloitte study ‘Radar 2022’ on Austria as a business location?
Harald Breit: In our survey, which was conducted in March this year, we interviewed around 230 companies, ranging from very large corporations to medium-sized and smaller businesses. However, there was a tendency towards larger and medium-sized companies. Many sectors were represented, from credit and financial institutions to manufacturing and service companies. The size of our organisation enables us to provide representative results here.
How much did the pandemic and the war in Ukraine harm or even help Austria as a business location?
Breit: Perhaps they helped indirectly, in a way that problems that resulted from the past and were somewhat hidden became clearer. A lot of things suddenly came to the fore, for example energy dependency. I don’t think that many people, companies and managers in Austria were aware that about 80 percent of gas supplies come from Russia. Until recently, you would also not have imagined the belligerent activities that Russia triggered in Europe. We have become painfully aware of how dependent Austria is on energy and gas supplies in particular. This went well for many years and certainly brought economic advantages due to favourable prices. Unfortunately, it has also become clear in the meantime that the possibilities for short-term alternatives are very limited. If you look at the forecasts of economic research institutes on the effects a Russian gas supply stop would have, it could lead to economic slumps of up to four or five percent of the gross national product. That would cost jobs and prosperity. Conversely, the energy transition towards renewable energy will hopefully be accelerated accordingly. At the moment, however, this is still more wishful thinking than reality and is proceeding very slowly.
The dependence on Russian gas has been common knowledge for some time. Is it something that was lacking on a management level?
Breit: Many people were not aware of the dramatic nature of the situation. I believe that there was a lack of transparency, and Austria is not alone in this. In Germany and in Europe in general, there was also a lack of awareness in this regard.
How can you describe the current mood among businesses for the rest of 2022 and for 2023?
Breit: It is evident that the mood is worse compared to autumn 2021. There was another lockdown in the winter and then the war in Ukraine. The third geopolitical component is the influence of the covid pandemic on global supply chains, i.e. lockdowns in China. The decisive factor, however, will be what happens in Ukraine and with energy supplies in autumn and winter. Of course, the economic development is weakening, inflation is very high and interest rate measures are being taken. Higher interest rates mean a higher cost of capital for companies and thus affect growth. The spectre that haunts the medium and longer term is the threat of recession or stagflation. We will have to live with less growth this year and probably also in 2023, the outlook has darkened. Finally, we are also confronted with a labour shortage across all sectors in Austria. There is a danger of a wage-price spiral here, which many companies fear. This will be a major challenge in the coming year.
Besides the results of the Deloitte study, what are your personal expectations? Total disaster or sunshine?
Breit: They are congruent with the results of our survey. We are in the midfield. The euphoric mood at the end of 2021 has given way to a sober reality. The March 2022 survey showed a positive mood among only 50 per cent of the companies, and a rather negative mood among 50 per cent. This has certainly shifted further towards a more negative expectation in recent months. Scepticism has increased further because the effects of many events will only be felt more clearly in 2023. This concerns above all the increased costs in the production sector. There are also supply problems. There is still a need for short-time work in some areas because supply chains are interrupted. Prices have risen in almost all areas. If sharply rising staff costs are added in the coming year, this will become a challenge for many companies, to the detriment of profitability. However, this depends on the sector, because tourism, for example, will definitely perform positively, as long as labour is available.
Companies cite security of energy supply as a major concern. Is that exaggerated?
Breit: If there is an interruption in oil and especially gas supply as a result of the Ukraine war, this will result in massive restrictions for the industry. The uncertainty surrounding the question of prioritising gas deliveries is also depressing the mood of companies. The long-term consequences are of course very difficult to assess.
Austria ranks in the midfield in many of the surveyed parameters, such as the labour market, health care system and taxes. Is that a negative or positive assessment?
Breit: That is the question of whether one perceives the glass as half-full or half-empty. We have the clear opinion that things could be much, much better. You would have to set a clear goal to get into the top field. Comparable countries in Scandinavia do much better in the global indices and rankings. Austria has fallen behind in the World Competitiveness Ranking. The Global Innovation Index is also important, as it measures innovation and research. Countries that are ahead in the Competitiveness Ranking are also ahead in innovation. On the one hand, this has to do with the general positive attitude towards research, development and entrepreneurship, and on the other hand with the education system. In the Pisa rankings, Austria is also in the midfield at best. We have just seen during the pandemic that digitisation in the school sector was in many cases completely inadequate. We are talking about the workers of tomorrow who will drive the Austrian economy in the future. That is why it is essential to push ahead with digitisation in the education sector. This is happening too slowly. The equipment with laptops and tablets is still very slow, and there is still a lot of room for improvement in digital know-how, especially among teaching staff.
If you take the Deloitte trend indicator, the bottom line in Austria is that the quality of life is excellent.
Breit: That has also suffered, but Vienna, for example, has been the most liveable city in the world for tens of years. But there were dark shadows, such as the division of society during the covid pandemic. In Austria, for the first time in decades, there was a polarisation of society, for example between vaccination supporters and vaccination opponents. When doctors and nurses are insulted and threatened outside hospitals, boundaries are crossed. Many people are worried about social cohesion in the country. Many people were also worried about the health system in general, as it was on the verge of reaching capacity.
According to the Deloitte ‘Radar 2022’, you advise Austria to take ten measures. Is there one among them that you would put at the top of the list of demands?
Breit: A ranking is always something subjective. If there is a clear number one, it is the issue of energy transition and the restructuring of the energy system. On the one hand, this is occasion-related due to the war in Ukraine, but on the other hand it also has to be seen in the medium and long term. The aspects of sustainability have taken a bit of a back seat, although both topics are closely intertwined and even compatible. If you want to get away from fossil fuels, there is no other option than to accelerate and create the energy transition. That is the top priority.
Are we on the right track when it comes to the energy transition?
Breit: There is good will in many things, but the implementation takes far too long. A good example is the long approval procedures for wind turbines – it takes up to seven years for a wind farm. We will not achieve the energy transition this way. Here, federalism and excessive administration are hindering urgently needed changes.
Expanding research funding and stimulating investment is another piece of advice from Deloitte to politicians.
Breit: Research funding spans a broad spectrum, and some things have improved. The research allowance has been increased significantly, but there is certainly more to be done. In locations with increased labour costs, we can only operate in areas where we produce high-quality and innovative products. This requires innovation. The eco-social tax reform also includes an increased investment allowance for investments in renewable energies.
Making the labour market more flexible is an ongoing issue. What needs to be done?
Breit: We need to bring qualified skilled workers to Austria in a more targeted manner, think of the Red-White-Red Card (NB: a special work permit). Existing resources must also be used much better. We have seen again with people from Ukraine what bureaucratic hurdles there are. This brings us back to the topic of digitisation. Why do you still need a blue card (NB: a work permit for Ukrainians) in the 21st century, for which the refugees had to wait for weeks? That should be possible digitally, for example via an app.
What is the problem?
Breit: We have a very complex system of federalism in Austria, which is a hindrance in some areas. The jungle of competences and the complex responsibilities between the federal government and the provinces do not make many things easier. You could see that when tackling the covid pandemic. Austria is actually a small country, but it has nine different federal states with nine different regulations. Does it make sense to invent the wheel nine times in different ways?
Is the Austrian education system as such still salvageable or does it need a ‘reinvention’?
Breit: To completely redesign everything is unrealistic, but we need to finally tackle the essential issues. That is all-day schooling, all-day childcare, which has a positive influence above all on language development and support. For those who cannot afford tutoring, there must be a comprehensive educational offer. This means that the infrastructure must be created to implement this.
Political will is needed here above all. You can reform a system if you really want to. Infrastructure is needed, such as the new construction and modernisation of school buildings, digital equipment and probably a different working model for educators. For example, longer compulsory attendance at school, so that afternoon care is available. That would be my ideal idea of school, which would also relieve parents. Which brings us back to the issue of the workforce, because many women are only employed part-time due to a lack of childcare options. Reforming the education system in this direction would also trigger a surge in new workers.
A Deloitte criterion is the stability of a country. Is Austria stable?
Breit: Yes, certainly.
You mention ‘the promotion of a positive and confident basic mood in the economy as a prerequisite for innovative strength, risk-taking and sustainable responsibility’. Does that work at all with the grumbling disposition of the (Eastern) Austrians?
Breit: I believe that the willingness to perform and the motivation are very much there, otherwise Austria as a business location would not be in a good overall position. It may well be that there is a disproportionate amount of grumbling in Eastern Austria. That may be part of the mentality. But I am convinced that people roll up their sleeves when it matters. Otherwise, we wouldn’t have this prosperity.
Is the unconditional basic income a concept that could increase the social cohesion and overcome the current divisive tendencies in society - things that you have called for?
Breit: I am very sceptical here. It would rather lead to polarisation than to increased cohesion within society. I believe that this is a niche issue. You could see that with the only moderately successful petition for a referendum. Accepting that someone wants to live at the expense of others for no particular reason, for example illness or accident, does not correspond to the Austrian mentality for the majority. The majority of the population rejects this.