14 July 1997 • Modest Recovery Continues • Markus Marterbauer

The growth of industrial output is mainly supported by the expansion in export markets and a substantial improvement in cost competitiveness as a result of the favorable development of labor costs and foreign exchange rates. Merchandise and tourism imports are expanding, however, at an even faster pace than exports. Disequilibrium in the current account is becoming ever more serious. The increase in the demand for labor is mostly reflected in an expansion of part-time employment. Unemployment remains high. Inflationary pressures are low.

The rise in foreign demand constitutes the mainstay of the current pick-up in industrial output. In the period from January to April, receipts from merchandise exports – the most important indicator of foreign trade until regular foreign trade statistics become available – exceeded last year's level by 6 percent. Austrian suppliers have been benefiting mainly from the expansion of the German manufacturing sector and from the boom in those European countries whose economies are closely linked to that of the USA. Exports to Italy and Switzerland suffer, however, from the weakness of economic activity in these two countries.

The growth of Austria's foreign markets is accompanied by a marked improvement in the international cost position of Austria's manufacturing industry. Increases in labor costs are substantially lower than productivity gains. Moreover, pressures emanating from foreign exchange markets have eased considerably: the real-effective exchange rate for manufactures declined by 41/2 percent since March 1995, thus retracing the increases since the fall of 1993.

WIFO's business survey – until output statistics become available again the most important indicator for the manufacturing sector – points to a sustained improvement in output expectations and to a more sanguine assessment of new orders. In view of the improved economic conditions such as the rise in foreign demand, higher cash-flow, and lower interest rates, manufacturing firms are planning an expansion in real investment by 4 percent above the high level achieved in 1996. Despite the weakness in domestic demand, imports rose at a faster pace than exports (+61/4 percent in the first four months of 1997 on a year-on-year basis). This adverse development might be due to the high import content of exports, lively investment demand, a rising marginal import propensity, as well as price and foreign exchange effects related to raw materials. Thus, the trade deficit is widening. At the same time, structural problems continue to depress the surplus in the travel balance. The disequilibrium in the current account continues to increase: the deficit reached ATS 11 billion in the period from January to April, up from ATS 41/2 billion during the same period in the previous year.

Per-capita income barely increased in real terms; on a net basis, disposable income even declined markedly as the fiscal consolidation drive imposed higher taxes and trimmed transfer payments. The resulting weakness in domestic demand had the strongest impact on retail trade: turnover stagnated in the first quarter of 1997 and may have plunged in April and May. The construction sector suffered from the public sector's investment restraint and the decline in residential construction. Only the dissolution of rental reserves has tended to stimulate adaptation works.

Weakness in domestic demand, low wage increases combined with high productivity gains, as well as persistent competitive pressures have brought about a great degree of price stability: the rate of inflation was as low as 1.7 percent in May. Towards the middle of the year the effects of the extension of the energy tax to electricity and gas, and of the rise in raw materials prices, all of which raised inflation in a year-on-year comparison, will level off.

Despite an increase in employment (in the first half of 1997 the employment gain was 13,300 over the same period in 1996) the situation in the labor market has not improved. Along with favorable weather at the beginning of the year, which stimulated output and employment in construction, the shift to part-time employment in various service sectors has produced substantial employment gains. Thus, the employment intensity of economic activity has risen considerably. The present economic recovery is too weak, however, to lower unemployment, as the additional jobs, mainly for female workers in the service industry, are filled by people from the hidden labor reserve. Unemployment remains disappointingly high. In the first half of the year the number of unemployed was slightly below the level of the same period in 1996; in June, however, the number of jobless exceeded last year's level by as much as 5,000.