The Austrian Economy in 1995: Early Faltering of the Recovery

1995 saw a surprising but nevertheless marked downturn in demand and output. Real GDP, having advanced by over 1 percent in the first half (from the previous period) slightly weakened as from mid-year. The annual average rate of economic growth was 1¾ percent, more than 1 percentage point down from the previous year and also lower than the EU average. Goods exports, which had accelerated markedly during 1994, kept strong momentum over most of 1995, although a faltering of the recovery in western Europe became clearly apparent. EU accession led to market share gains, but they became squeezed later by losses in competitiveness due to the fall in the dollar and the devaluation of southern European currencies. Demand from the rising economies in eastern Europe also lent firm support to export growth. Tourism demand from abroad remained on a downward trend. Following heavy losses in the previous year, export revenues in 1995 fell by another 4½ percent in volume. The major reasons for the decline were unchanged: large price cuts for air-travel arrangements to overseas destinations; a decline in price competitiveness due to the exchange rate shifts; and the persistent stagnation of real disposable household incomes in Germany, Austria's most important travel market. Overall domestic demand advanced by a price-adjusted 2¾ percent in 1995. The annual average figure masks a distinct turnaround from a strong rise in the first half year to a decline thereafter. This pattern was shaped mainly by investment. In the six months up to March 1995, firms spent much more than before on machinery and equipment – partly as a reaction to the rebound in activity from the recession, and partly with regard to the expiration of a temporary increase in the investment tax allowance. Later in the spring, they still relied on a continuing recovery. However, developments thereafter prompted them to cancel or postpone some of the ambitious investment projects. At around the same time, the boom in construction which had spanned over the last seven years came definitively to an end. Private consumption remained on a comparatively steady growth path. Real disposable household incomes were boosted by higher wages – negotiated in late 1994 on the basis of a projected strengthening of the recovery –, employment gains and lower inflation. The high level of consumer confidence is confirmed not only by a decline in the saving ratio, but also by the high share of additional income being spent on foreign travel and on goods purchases abroad. Domestic retailers, on the other hand, gained little from higher consumer spending. In spite of exports staying lively throughout the year, the current account deficit more than doubled to a total ATS 47 billion or 2 percent of GDP. The opening of the domestic market related to EU accession and the initially strong investment demand – with its high import content – prevented the trade deficit from narrowing. The traditional surplus on tourism services declined further as foreign visitors stayed away and Austrians spent more abroad. With output growth losing momentum demand for labor slackened. Towards mid-1995, overall employment fell below the year-earlier level and by the end of the year the gap had widened to –30,000 or 1 percent. Labor supply was reduced by early retirement so that the fall in employment did not fully translate into registered unemployment. According to international standard definitions (EU criteria) the unemployment rate was still low at 3.6 percent. Price inflation decelerated at all levels – producers, trade, consumers – in 1995, as three factors combined: EU membership entailing the adjustment of agricultural prices and more competition in the trade sector; lower import prices due to effective schilling appreciation; and the cyclical slackening of demand. The annual inflation rate abated from 3 percent in 1994 to 2.2 percent.