Cautious Optimism for Christmas Business

Although economic activity is expanding in the EU countries, private consumption remains subdued as a result of restrictive fiscal policies. In Austria, too, income growth was dampened by measures to consolidate the public sector deficit. The first measures were implemented in the middle of 1996; they triggered pre-emptive purchases before and caused buying restraint after this date. As pre-emptive purchases are usually balanced within a year, these effects were still noticeable in the first half of 1997. Thus, consumer expenditures, adjusted for price increases, declined by 1 percent on a year-on-year basis in the first half of 1997. The demand for durable consumer goods (first half of the year –9.4 percent), for automobiles in particular (–22.2 percent), reacted most strongly to the change in income and to the fiscal measures. According to model calculations, the fiscal consolidation measures implemented at the beginning of 1997 reduced the income of private households by about 2 percent. The modest decrease in consumer spending in the first half of the year (–1 percent) implies a decline in the saving ratio by 1 percentage point. Thus, Austrian consumers have not reacted to the small reduction in income with cautionary saving and have helped to smooth economic activity. As the year-on-year effect of pre-emptive purchases will no longer be felt in the second half of 1997, private consumption will expand slightly (+0.5 percent) for the whole year. This forecast is supported by the trend in retail sales: the sales slump of 3.3 percent (in comparison to the level one year earlier, elevated by pre-emptive purchases) in the months from January to May was followed by a gain of 2.3 percent during the months from June to August (average of the months from January to August: –1.2 percent).