24 January 1999 • Austrian Economy Prepared for EMU. Medium-term Projection for the Austrian Economy Until 2002 • Andrea Weber, Fritz Schebeck

A stronger international competitive position and brisk domestic demand will have a positive impact on the Austrian economy in the next years. Assuming that the international financial crisis will be temporary in its detrimental effect and that the public budget consolidation policy will continue, there are no obstacles to the achievement of stable growth. In 1997-2002, GDP will grow by 23/4 percent p.a. on average, which is slightly above the EU average rate.

Growth of the Austrian economy has accelerated since 1996. The dynamic development is likely to be temporarily stayed by the effects of turbulences on the international financial markets. After a slight slowdown in 1999, total output will once again expand strongly.

As a result of production expansion and measures under the National Action Plan for Employment, some 100,000 additional jobs could be created in the projection period. Unemployment should decline by about 1 percentage point (from 7.2 to 6.2 percent of the dependent employment in line with the traditional definition; from 4.4 to 3.7 percent in accordance with the EU definition).

Net exports will make a positive contribution to growth of 1/4 percent of GDP on average. Improved terms of trade and an upswing of the domestic tourism industry will provide for a noticeable reduction of the current account deficit over the next years.

In the projection period domestic demand is supported by strong and steadily growing private consumption (+2 percent p.a. in real terms on average). Consumer confidence has improved. As a consequence of the growth of disposable real income of private households, the household saving ratio will gradually be returned to its long-term equilibrium value.

At an average growth of 4 percent p.a., gross fixed capital formation up to 2002 will rise at double the pace of 1991-1997. Machinery and equipment investment will develop more dynamically, while construction investments will grow moderately as a consequence of the redimensioning process in residential housing construction.

Neither import prices nor unit labor cost are expected to make for any upward trend of prices domestically, and sustained competitive pressure effectively restricts price increases, so that prices will remain stable. The average rate of inflation will be 11/4 percent p.a.

According to the projection (which does not consider the plans for tax reform), budget consolidation will continue in 2000, after a hiatus in 1999. The deficit in general government financial balance will be less than 11/2 percent of GDP, general government gross debt, on the other hand, will not decline below 60 percent of GDP.