17. April 2002 • Cyclical Recovery Expected to Proceed Smoothly. Economic Outlook for 2002 and 2003 • Ewald Walterskirchen

The business cycle recovery in the USA will give early incentives to activity in Europe during the first half of 2001, leading to a marked revival of demand and output growth. Such expectations are confirmed by survey results and statistical data collected over the past few months. The WIFO projection for economic growth from last December may therefore remain unchanged.

Domestic business activity is set to pick up smoothly in the course of this year. From quarter to quarter, real GDP should rise by a seasonally adjusted 1/2 to 3/4 percent, yielding an annual growth rate of more than 21/2 percent towards the end of the year. Due to the low starting level (negative statistical overhang from last year), the average growth rate in 2002 will only be 1.2 percent, while in 2003 the projected 2.8 percent would be clearly above the medium-term trend.

Underlying this forecast is a cyclical recovery in the USA and in Europe, which is being announced by key leading indicators, such as business sentiment in the major countries or the low interest rates. The major factor of uncertainty is currently the political unrest in the Middle East which may keep oil prices high or drive up still further.

The forecast for inflation has to be adjusted slightly upwards, as oil prices are exceeding earlier expectations. Consumer prices may rise by 1.7 percent this year, still 1 percentage point less than in 2001.

No turnaround is as yet visible on the labour market. Data for the annual average 2002 will be weaker than for last year. The rate of unemployment (as traditionally defined) will go up from 6.1 to 6.7 percent. Nevertheless, by 2003 employment should pick up significantly, allowing the jobless rate to fall.

Public finances have returned to balance in 2001, for the first time since 1974. The closing of the deficit has been achieved on the back of a sharp rise in the tax burden. In 2002 and 2003, budget deficits should remain close to zero. In the current year, the cyclical weakness is complicating the task of balancing the budget; in 2003, while economic conditions should be more favourable, some revenues will be lost as a number of temporary measures wear off. Thus, if budget balance is to be maintained, the scope for a tax reform is extremely limited.

Vienna, 16 April 2002.