The Austrian Economy in 1996: Slow Growth, but High External Deficit

Over the past year, the Austrian economy remained in a phase of cyclical sluggishness. The recovery which had set in in late 1993 came to an unexpected halt around mid-1995, with demand and output slackening thereafter. In early 1996, activity hit a low when the downturn was exacerbated by severe winter conditions. Weather-related output losses in manufacturing and construction were caught up during spring, while wholesale and retail trade benefited from lively consumer demand: many households carried forward purchases of motor cars and other durables, before tax increases and other measures of the fiscal consolidation "package" took effect. While from mid-year onwards private consumption lost momentum, foreign demand picked up strongly towards the end of the year. In all, however, the business cycle recovery advanced slowly, with real GDP rising by an annual average of barely 1 percent, well below the medium-term trend and rather weak also in an international comparison. Several factors were responsible for the weak growth performance: • stagnation tendencies in major trading partner countries in western Europe; • repercussions of the March 1995 exchange rate turbulences leading to marked depreciation of the U.S. dollar, the Italian lira and other currencies; • the comprehensive fiscal consolidation program agreed upon by the new federal government following the December 1995 elections; • structural deficiencies and adjustment problems in sectors being exposed to stronger international competition following Austria's accession to the EU and the transition in eastern Europe. Despite the unfavorable external conditions, merchandise exports held up relatively well, rising 5½ percent in volume and allowing Austrian firms to gain foreign market shares. Suppliers of tourism services, on the other hand, suffered a further fall in export revenues, by 1¼ percent in volume terms. Domestic demand also stayed robust, advancing by a price-adjusted 1¼ percent. Consumers spent over 7 percent (in real terms) more on durables than in 1995, thereby lowering markedly their saving propensity. The corporate sector spent 4 percent more on machinery and equipment; manufacturing industry stepped up investment to a still higher degree although firms generally rated their order inflow and capacity utilization as unsatisfactory. Rationalization and modernization provided strong investment incentives, profits maintained on the whole a comfortable level and interest rates came down further. Imbalances in the labor market increased further. Overall employment fell by almost 21,000 on annual average, with the decline leveling off later in the year. Rising demand for early retirement helped to reduce labor supply; still, registered unemployment rose by nearly 15,000. By international comparison, unemployment in Austria is still rather low, at a rate of slightly above 4 percent of the labor force. Consumer price inflation fell to an annual rate of 1.9 percent. Contrary to expectations and in spite of slackening domestic demand, Austria's current account hardly improved in 1996. The deficit, while falling from ATS 47 billion in 1995 to 42½ billion, remained high at a ratio of 1.8 percent of GDP. Moreover, the shrinking of the deficit was entirely due to lower net transfers to the EU household, while both the trade balance and particularly the balance of tourism services weakened. Net revenues from foreign travel have slumped by more than two-thirds within the past few years.