Exports Support Economic Growth – Budget Consolidation Weakens Domestic Demand

Austria's economy is projected to grow at an annual rate of 2.4 percent on average until the year 1999. This forecast takes account of the consequences of Austria's accession to the EU as well as of the envisaged budget consolidation. The mainstay of economic growth will be merchandise exports; these are likely to be boosted by the expansion of the German economy as well as by the lively import demand in the countries of East-Central Europe. Tourism exports will recover only very slowly from the severe set-back of 1994. Thus, in the current account, balancing forces will gain momentum only after several years of high deficits. Austerity measures to reduce the federal budget deficit will dampen the growth in household incomes and in consumer demand. Private consumer expenditures will rise faster than disposable income of households, and the savings ratio will decline. Investment in machinery and equipment will be mainly motivated by the desire to cut costs. Investment in construction is likely to grow at a slower pace than in previous years, with public works construction suffering the most from budget expenditure cuts. With employment rising moderately, output per employee will post a solid gain during the recovery. The unemployment rate will therefore decline only marginally in the upswing and will reach 6.6 percent on average (on the conventional definition). Dependent employment will gain 0.6 percent per year over the period 1995 to 1999. The situation in the labor market and strong competitive pressures suggest that the gain in labor productivity will not fully translate into real wage increases. Neither labor costs nor import prices will fuel inflation. If fiscal consolidation will limit itself to raising the tax on gasoline, the inflation rate of 2.7 percent in 1995 might decline to 2½ percent in 1999. The termination of transitory burdens occasioned by Austria's accession to the EU and the planned fiscal consolidation measures will reduce government net lending from 4.6 percent of gross domestic product in 1995 to 2.6 percent in 1995.