14 April 2003 • Economic Growth Remaining Subdued. Economic Outlook for 2003 and 2004 • Markus Marterbauer

For the third year in a row, the Austrian economy will grow by only around 1 percent in 2003. Adding to the persistent weakness of domestic demand are the economic repercussions of geo-political instability. For 2004, uncertainties are particularly large, with growth projected to stay below average (1.7 percent). Weak overall economic conditions will lead to a further rise in unemployment and a widening budget deficit.

The Austrian economy grew by 1 percent in real terms in 2002, a rate close to what WIFO had expected as early as December 2001 (1.2 percent). Yet, in the third and fourth quarter, GDP remained flat on a seasonally adjusted basis, with stagnation likely to continue this year. The main reasons are the consequences of geo-political instability for the economy as well as continued sluggishness of domestic demand. GDP growth in 2003 is currently expected at 1.1 percent, remaining close to a modest 1 percent for the third consecutive year. Such an extended period of weak activity has not been observed to date.

Prospects for 2004 are necessarily vague at this stage, given the great uncertainty surrounding geo-political developments and the reaction of economic policy. At present, growth is projected at 1.7 percent, remaining again clearly below the long-term trend. Both in 2003 and 2004, the pace of expansion would thereby correspond to the euro area average. A cyclical upswing in Europe appears unlikely, unless world-wide uncertainty subsides and commodity prices ease markedly. Underlying the present projection are the external assumptions of a reference price of 29 $ per barrel for crude oil in 2003 and of 23 $ per barrel in 2004, and an exchange rate of 1.08 $ per euro.

The real-effective appreciation of the euro is holding back the rise in Austrian exports. Merchandise exports are seen rising by 4.3 percent in volume this year, and by 7.5 percent in 2004. As in the past two years, however, and despite the weak international environment, exports will stay the main driving force of Austrian economic growth. The weak momentum of foreign demand is dampening investment in the export-oriented business sector. Spending on machinery, vehicles, electronic equipment and software may pick up by an inflation-adjusted 3 percent this year, after having fallen by a cumulated 13 percent since 2000. Towards the end of the year, some positive effects may be expected from spending being carried forward in view of the temporary investment premium expiring. A genuine cyclical recovery of investment may set in by 2004, with expenditure on new equipment projected to gain 5.5 percent. Growth of manufacturing output, expected at 1.8 percent in volume in 2003 and 3 percent in 2004, will also be constrained by weak demand. This will not suffice as to prevent further substantial job losses in industry.

Domestic demand developments remain below the long-term average. After a decline in 2001 and 2002, a slight pick-up may be expected for the current year. Spending of private households is held back by the unsatisfactory labour market situation and the modest gains in net incomes. Nevertheless, private consumption is set to increase by nearly 1½ percent, while public consumption will remain flat. Construction investment in civil engineering is benefiting from higher spending on road and railroad infrastructure, whereas the building sector lacks stimulus.

Consumer price increases are slightly gaining momentum, with the rate of inflation projected at 1.9 percent. Upward pressure is being exerted both by energy and services prices, notably related to housing, but also by industrial manufactures prices. Next year, inflation should moderate to a rate around 1½ percent. The appreciation of the euro is dampening the rise of import prices, and unit labour costs should be of stabilising influence.

Slow economic growth has pushed up the number of unemployed by a cumulated 38,000 in 2001 and 2002. The negative trend is unlikely to reverse during the forecast period. In 2003, the number of actively employed will fall again slightly, with job losses being concentrated in manufacturing, construction and trade. The public sector is planning further cuts in personnel. Unemployment is likely to increase by 8,000 people to a level of 240,000 on annual average 2003, yielding a jobless rate of 7 percent of the dependent labour force (national definition) or 4.2 percent of the total labour force (Eurostat concept). While in 2004 employment may pick up somewhat, unemployment is unlikely to decline, as both the initial steps towards the abolition of early retirement and the expected large inflow of foreign workers will add to labour supply.

The general government account recorded a deficit of Euro 1.2 billion or 0.6 percent of GDP last year, according to the Ministry of Finance and Statistics Austria. For 2003, no draft Federal budget has yet been submitted. WIFO expects an increase in the overall deficit to some Euro 2¾ billion or 1.2 percent of GDP, due to the dampening effect of the cycle on tax revenues, the deferred payments for flood relief, and additional outlays such as for family subsidies. Also in 2004, adverse cyclical conditions will leave their mark on the budget in the form of revenue shortfalls and high outlays for unemployment benefits. The general government deficit may amount to 1 percent of GDP.

For further information, please refer to Mr. Markus Marterbauer, phone (1) 798 26 01, ext. 303. For the full text of this article see the Internet under http://www.wifo.ac.at/ mid of April.