WIFO

Markus Marterbauer

Marked Slowdown of Growth in Europe Dampening Domestic Business Activity

Economic Outlook for 2001 and 2002

Economic growth in Austria is set to decelerate from 3.3 percent in 2000 to 1.7 percent this year, and may pick up to slightly above 2 percent in 2002. The slowdown is mainly due to weaker activity in Europe which itself is the consequence of the abrupt cyclical slackening in the USA and of higher energy costs. A further deterioration of business conditions in Europe may not be excluded, given the hesitant reaction of economic policy. Domestic demand in Austria should prove relatively robust, although construction activity is showing clear signs of weakness. The projection for inflation has been revised substantially upwards, both for this year and next (2.6 and 1.9 percent, respectively). The decline in unemployment is coming to a halt.

All staff members of the Austrian Institute of Economic Research contribute to the Economic Outlook. E-mail address: Markus.Marterbauer@wifo.ac.at • Cut-off date: 27 June, 2001

CONTENT

Significant cyclical reversal in Europe

Cyclical weakening in foreign trade and manufacturing output

Stable current account deficit

Consumption lending support to activity despite lower real incomes

Sluggish demand for construction

Stubborn inflation

No further fall in unemployment

Government budget hit by slower growth, but benefiting from inflation

LIST OF TABLES AND FIGURES

Table 1: Main results. 3

Table 2: World economy. 6

Table 3: Productivity. 7

Table 4: Private consumption, earnings and prices. 8

Table 5: Earnings and international competitiveness. 9

Table 6: Labour market 12

Table 7: Key policy indicators. 14

Figure 1: International context 5

Figure 2: Economic performance. 13

[1] GDP growth in Austria attained 3.3 percent in 2000, and demand and output remained lively in the first quarter 2001 (+2.4 percent). Since then, however, signs of a slower pace of activity are becoming more frequent.

[2] Business conditions in Europe have weakened markedly over the past few months, and GDP growth in 2001 is unlikely to exceed 1¾ percent. This is the consequence of slower growth in the USA on the one hand, transmitted to Europe via slackening foreign trade and the downturn on financial markets; on the other hand, the persistence of high energy prices is eroding consumer purchasing power. Domestic demand in the EU is therefore hardly able to drive the economy forward. This holds true particularly for Germany, where GDP growth is expected at little above 1 percent this year. Unlike in the USA, economic policy in Europe is taking an ostensibly cautious attitude in the face of the rapidly weakening business cycle: the monetary authorities are being more concerned about still rising inflationary pressure, while fiscal policy maintains its consolidation-oriented stance. The risks of the present projections are therefore biased towards demand in Europe turning out even weaker than assumed.

[3] Slower growth in Europe is being clearly reflected in the more export-oriented sectors of the Austrian economy. Merchandise exports in 2001 may advance at a moderate 4½ percent in volume year-on-year. Manufacturing output is also slowing down considerably, as suggested by second-quarter results from the regular WIFO business survey showing a significant deterioration of the business climate notably for producers of intermediate and investment goods. Overall production of manufactures is expected to rise by only 2¾ percent annual average, following a more than 8 percent increase last year. Along with the slower pace of output and foreign trade, expansion of investment in machinery and equipment, and of wholesale trade will be dampened. While imports are also set to lose momentum, the trade deficit may edge up to ATS 80 billion. The negative gap in the current account may widen to a ratio of 3 percent of GDP.

[4] In Austria, consumption expenditures of private households are stabilising overall demand. On average 2001, they are projected to expand by 1.8 percent at constant prices. Since rising inflation and higher taxes make for a fall in net real incomes from employment and social transfers (-0.5 percent) and in employees' per-capita earnings (-0.8 percent), such increase in consumption would imply a marked decline in savings as percent of private disposable income. For next year, somewhat higher wage settlements are assumed, and newly-introduced social transfers (child care benefits) will further boost disposable income, allowing for a slight acceleration in the growth of consumer spending.

[5] In the construction sector, a sharp drop in the workforce points to weak output prospects (+0.5 percent). Indeed, output is falling in residential construction (due to lack of demand) and in communal civil engineering (in view of budgetary restraint on the Federal states' as well as the municipal level). Nevertheless, construction investment as a ratio of GDP continues to exceed the EU average to a substantial degree.

[6] General government finances will be adversely affected by slower economic growth. Higher inflation, on the other hand, will tend to improve the budget balance, notably from the revenue side. General government net borrowing is projected at 0.5 percent of GDP for the current year. Whether in 2002 the aimed-for balanced budget will actually be achieved will depend on further business cycle developments, but even more on large-scale transfers "off budget" of public activities (and related expenditures and deficits) that have been initiated, and whether these will be recognised by Eurostat. In the event of a stronger-than-expected slump in business activity, budgetary policy should be ready to let automatic stabilisers operate to full effect.

Table 1: Main results
	1997	1998	1999	2000	2001	2002
	Percentage changes from previous year
GDP
Volume	+1.3	+3.3	+2.8	+3.3	+1.7	+2.2
Value	+2.6	+4.0	+3.7	+4.5	+3.3	+4.0
Manufacturing1, volume	+4.2	+4.4	+2.4	+8.3	+2.7	+3.5
Private consumption expenditure, volume	+1.4	+2.9	+2.3	+2.7	+1.8	+2.0
Gross fixed investment, volume	+1.0	+2.7	+3.2	+3.4	+1.3	+2.4
Machinery and equipment2	+5.4	+5.2	+4.6	+6.0	+2.3	+4.0
Construction	-2.0	+0.9	+2.2	+1.3	+0.5	+1.0
Exports of goods3
Volume	+16.5	+8.1	+7.7	+13.0	+4.5	+5.7
Value	+16.8	+8.4	+7.0	+15.6	+7.3	+8.3
Imports of goods^3
Volume	+9.4	+7.1	+6.9	+8.7	+4.5	+5.0
Value	+10.9	+6.6	+6.7	+14.7	+7.6	+7.6
Current balance billion ATS	-79.2	-64.5	-85.4	-80.9	-85.9	-80.6
billion EUR			-6.2	-5.9	-6.2	-5.9
As a percentage of GDP in percent	-3.2	-2.5	-3.2	-2.9	-2.9	-2.6
Long-term interest rate4 in percent	5.7	4.7	4.7	5.6	5.2	5.0
Consumer prices	+1.3	+0.9	+0.6	+2.3	+2.6	+1.9
Unemployment rate
Percent of total labour force5 in percent	4.4	4.5	4.0	3.7	3.6	3.6
Percent of dependent labour force6 in percent	7.1	7.2	6.7	5.8	5.7	5.7
Dependent employment7	+0.4	+1.0	+1.2	+1.0	+0.4	+0.5
General government financial balance
As a percentage of GDP in percent	-1.7	-2.2	-2.1	-1.1	-0.5	±0.0
1 Value added, including mining and quarrying. - ^2 Including other products. - ^3 According to Statistics Austria. - ^4 10-year central government bonds (benchmark). - ^5 According to Eurostat. - ^6 According to Labour Market Service. - ^7 Excluding parental leave and military service.

[7] Since inflation proved more persistent during spring than anticipated, the price forecast has to be revised substantially. Higher energy costs and meat prices, as well as rising indirect taxes and public charges have accelerated overall inflation in the first half of this year. The price increases are feeding through to manufactures, transportation services and housing costs and drive up prices there. On annual average, headline inflation may rise to 2.6 percent, before abating to 1.9 percent in 2002, if energy and meat prices level off.

[8] Weaker economic growth is clouding the outlook for the labour market. Employment (excluding people on maternity leave and in compulsory military service) is expected to edge up by only 13,000 (+0.4 percent); the number of unemployed may remain close to 190,000, corresponding to a jobless rate of 3.6 percent of the labour force (EU definition) or 5.7 percent of the dependent labour force (following the conventional national calculation method).

Significant cyclical reversal in Europe

Business activity in Europe is slackening faster than expected, on the back of sluggish activity in the USA and the squeeze in private real income from higher energy costs. Monetary and fiscal policy seem little inclined to take substantial cyclical counter-action. A pick-up of growth in Europe in 2002 thus depends essentially on a timely recovery in the USA.

[9] Cyclical conditions in Europe have weakened clearly more in recent months than had been anticipated by most forecasters in the Spring round of projections. Euro area GDP grew 2½ percent in volume year-on-year in the first quarter, in Germany only 1½ percent. At the same time, leading indicators have been pointing downwards, particularly business judgements of export orders and production expectations. The growth indicator developed by the Euroframe group suggests modest GDP increases of 1¾ and 1½ percent for the second and third quarter, respectively. On annual average, growth may be expected at 1¾ percent, roughly half the rate attained last year.

[10] The significant cyclical reversal in Europe is caused by several factors. First, the near-stalling of growth in the USA has a substantial dampening effect on European and Asian exports, despite favourable exchange rate developments. With U.S. GDP growth projected to drop from 5 percent in 2000 to some 1½ percent this year, demand for imports will slacken markedly. While manufacturing output has fallen strongly since late autumn 2000, demand for consumer goods and construction have acted as cyclical stabilisers. Both aggregates have benefited from decisive policy action. Interest rate policy has managed to avert a drastic fall on stock markets thus avoiding a decline in private consumption up to now; and fiscal policy is set to boost household disposable incomes in the second half of the year. Both elements may set the stage for a cyclical rebound, which however should only be expected to take hold late in the year.

[11] Second, investment in the new information and communication technologies, which had been booming in the USA in the latter part of the past decade, has now largely subsided. In Europe, too, this sector is now facing weaker demand. In particular mobile phone companies have not only come under pressure on stock markets, but are also cutting personnel and plans for capital spending.

[12] Third, the rise in energy prices has led to a squeeze in real disposable income and a shortfall in private household demand. Crude oil prices have so far not eased to the extent expected, as industrialised countries have built up their oil reserves. On annual average, international benchmark prices may fall by only around $ 2 per barrel from last year. In addition, the weak euro is keeping import prices high. The rise in energy prices constituted an extra burden for consumers of almost 1½ percent of their overall spending in 2000, and of ¾ percent still in early 2001. Taken against the rise in inflation, wage settlements in Europe have been clearly moderate. The small scope offered by real per-capita wages and disposable income is bearing down on consumer demand.

[13] In general, however, inflation in Europe remains rather moderate, given the strong rise in energy prices, and when compared with the experience of the earlier oil price shocks in the mid-1970s and early 1980s. Nevertheless, the expansionary effects of the tax cuts effective from early this year in several EU countries are largely being sterilised by the higher energy prices consumers have to pay. Moreover, these tax cuts are often accompanied by severe restraint on government spending. Thus, in Germany, the latter is to decline in real terms this year, according to the draft Federal budget. The impact of fiscal policy on disposable income can therefore hardly be assumed expansionary.

[14] Unlike in the USA, economic policy in Europe has so far not reacted to the marked slowdown of economic growth. The forecasts issued by the European Commission and the European Central Bank (ECB) have until most recently been too optimistic and did not suggest a need for policy counter-action. The fact that the rate of inflation, albeit due to special factors, exceeds the stability target range, is further narrowing the ECB's scope for interest rate cuts. Following the European Commission, the efforts at budgetary consolidation should not be relaxed. Yet, fiscal policy would be misled if it tried to offset the revenue shortfalls caused by the cyclical weakening via additional expenditure cuts, as this would only exacerbate the slowdown.

[15] As yet there are no positive signs suggesting the European economy will soon regain momentum. One should therefore assume that sluggish activity will continue into the next few quarters. It is only in the event of a pick-up in the USA that Europe would receive the necessary demand stimulus, with the usual time lag of three to six months. Since such stimulus would only take effect some time next year at the earliest, the projections assume an only modest acceleration of EU GDP growth to just above 2 percent on annual average 2002.

Figure 1: International context

¹ Manufacturing; in a common currency vis-à-vis trading partners. - ² 10-year central government bonds (benchmark).

Table 2: World economy
	1997	1998	1999	2000	2001	2002
	Percentage changes from previous year
Real GDP
Total OECD	+3.2	+2.4	+3.0	+3.8	+1.3	+2.0
USA	+4.4	+4.4	+4.2	+5.0	+1.5	+2.5
Japan	+1.8	-1.1	+0.8	+1.7	±0.0	+1.0
EU	+2.5	+2.9	+2.6	+3.4	+1.7	+2.1
Euro area	+2.3	+2.9	+2.6	+3.4	+1.7	+2.1
Germany	+1.4	+2.1	+1.6	+3.0	+1.3	+1.8
Central Eastern Europe1	+4.9	+3.4	+3.2	+4.0	+2.8	+4.0
World trade, volume	+10.0	+5.6	+6.2	+13.0	+5.3	+6.2
OECD exports	+10.7	+5.6	+5.0	+13.0	+4.7	+5.6
Intra-OECD trade	+11.3	+8.3	+7.5	+12.3	+4.5	+6.5
Market growth2	+10.3	+10.6	+6.7	+10.8	+4.0	+5.5
Primary commodity prices, in USD
HWWA index, total, 1990 = 100	-2.0	-22.0	+12.0	+31.0	-4.0	-1.0
Excluding energy	+0.0	-13.0	-8.0	+1.0	+2.0	+3.0
Crude oil prices
Average import price (cif) for OECD countries USD per barrel	19.1	12.6	17.3	28.0	26.0	25.0
Exchange rate USD per ECU or EUR	1.134	1.121	1.067	0.924	0.92	0.96
^1 Poland, Slovakia, Slovenia, Czech Republic, Hungary. - ^2 Real import growth of trading partners weighted by Austrian export shares.

Cyclical weakening in foreign trade and manufacturing output

Restrained demand from major trading partners is putting a brake on domestic merchandise exports, in spite of their favourable price competitiveness. As a consequence, this also dampens the expansion of industrial production, investment in machinery and equipment, and wholesale trade.

[16] Economic activity in Austria is determined to a high degree by the European business cycle. That is why last year the highly export-dependent sectors - mainly manufacturing production and investment in machinery and equipment - were booming. Merchandise exports rose by an inflation-adjusted 13 percent year-on-year. By the first quarter 2001, this rate had come down to 6 percent. The global slowdown and weaker demand from key trading partners in Western Europe should be reflected still more strongly in the data from the second quarter onwards. Market growth for Austrian exports is decelerating to a projected 4 percent this year. However, manufacturing unit labour costs having fallen by 6 percent last year against the average of trading partners, a favourable competitive position should allow domestic producers to gain market shares. Merchandise exports may rise by 4.5 percent in volume this year and, assuming a pick-up of growth in Europe, by close to 6 percent in 2002.

[17] The slower pace of goods export growth is having a direct dampening impact on manufacturing output. While the latter still advanced by 6 percent year-on-year in the first quarter and employment came to exceed the year-earlier level until May, the WIFO business survey for the second quarter showed a significant weakening of the business climate, notably in the cyclically sensitive areas of primary goods and technical manufactures. This suggests that the upward trend of production will become considerably flatter in the second half of the year. For the whole of 2001, manufacturing output may gain 2.7 percent in real terms. Assuming a return to stronger overall activity in Europe during 2002, production may accelerate to 3½ percent. Productivity growth should remain below its longer-term trend, much as observed in earlier periods of cyclical slowdown in the past.

[18] Historical evidence points to a close correlation between goods exports and investment in machinery and equipment. A weaker outlook for final sales in 2001 should therefore be expected to negatively affect firms' propensity to invest. This may all the more be the case, as part of investment plans have been carried forward into the fourth quarter 2000 for tax reasons. The projected growth profile for capital spending on machinery, vehicles, electronic equipment and software is 2¼ percent in 2001 and 4 percent in 2002.

Table 3: Productivity
	1997	1998	1999	2000	2001	2002
	Percentage changes from previous year
Total economy
Real GDP	+1.3	+3.3	+2.8	+3.3	+1.7	+2.2
Employment1	+0.5	+0.8	+1.4	+0.9	+0.6	+0.6
Full-time equivalent	+0.2	+0.2	+0.6	+0.6	+0.2	+0.2
Productivity (GDP per employment)	+0.8	+2.5	+1.4	+2.5	+1.1	+1.6
Full-time equivalent	+1.2	+3.0	+2.2	+2.7	+1.5	+2.0
Manufacturing
Production2	+4.3	+4.5	+2.4	+8.3	+2.7	+3.5
Employees3	-1.4	+0.1	-0.7	+0.0	-0.5	±0.0
Productivity per hour	+5.9	+4.3	+3.8	+8.4	+3.2	+3.5
Working hours per day for employee4	-0.1	+0.1	-0.6	-0.1	±0.0	±0.0
1 Dependent and self-employed according to National Accounts. - ^2 Value added. - ^3 According to Association of Austrian Social Security Institutions. - ^4 According to "Konjunkturerhebung" of Statistics Austria.

Stable current account deficit

[19] Slower growth of merchandise exports and of machinery and equipment investment also dampens imports via weaker demand for basic commodities and intermediate goods. In the second half of 2001, lower oil prices and an appreciating euro exchange rate may also hold import values down. Demand for consumer durables, which exhibit a high import share, is rising below-average. Goods import volumes may increase by 4½ percent in 2001, the same rate as projected for export volumes. Import prices could rise slightly faster than export prices. The deficit in the trade balance would thereby widen to a total ATS 80 billion.

Table 4: Private consumption, earnings and prices
	1997	1998	1999	2000	2001	2002
	Percentage changes from previous year, volume
Private consumption expenditure	+1.4	+2.9	+2.3	+2.7	+1.8	+2.0
Durables	-1.2	+7.0	+8.4	-0.4	+1.5	+2.3
Non-durables and services	+1.7	+2.3	+1.4	+3.2	+1.8	+2.0
Net wages and salaries	-1.8	+2.7	+2.9	+2.2	-0.5	+1.3
	Percentage changes from previous year
Direct lending to domestic non-banks^1	+3.6	+3.7	+5.2	+6.7	+4.3	+4.8
Inflation rate	In percent
All items	1.3	0.9	0.6	2.3	2.6	1.9
Core inflation2	1.1	1.2	0.8	1.8	2.9	2.4
^1  End of period. - ^2  Excluding food and energy items.

[20] In the tourism services balance, the surplus is set to edge down. While foreign revenues are rising by a healthy 3.4 percent in real terms, domestic spending on foreign travel may increase still more. While the surplus on "other services", which includes inter alia transportation services, keeps growing, the incomes and transfer balance continues to exhibit substantial negative gaps. In all, the current account deficit may rise to a total ATS 86 billion in 2001, equivalent to nearly 3 percent of GDP.

Consumption lending support to activity despite lower real incomes

Private consumption once again acts as a stabiliser of overall demand. Assuming a fall in the saving ratio, consumption is expected to grow by 2 percent p.a. over the projection period, in spite of a marked decline in real income.

[21] Real net disposable income from employment and social transfers rose by 2.6 percent p.a. between 1997 and 2000, providing the base for private household spending rising at the same pace. In 2001, net disposable income will decline for the first time since 1997, by an inflation-adjusted 0.5 percent. Likewise, real net earnings per employee will likely fall by 0.8 percent year-on-year, as a result of rising inflation which largely takes away the gains from last autumn's wage round. Moreover, tax increases enacted as part of the fiscal consolidation process are reducing net earnings per capita by nearly 1 percent on average.

[22] In the past, private households have in periods of falling disposable income always reacted with a lower saving ratio, trusting in the temporary nature of the income squeeze and in the stabilising role of the welfare state. Such behaviour can also be assumed for the current cyclical downturn (precise information on disposable income and the saving ratio is currently not available, due to a statistical change-over to ESA '95 standards). Private consumption expenditure rose by 2 percent year-on-year in volume in the first quarter. For the whole year, the increase is expected at 1.8 percent.

[23] In 2002, per-capita earnings may advance by 2.8 percent (+3.2 percent on a full-time-equivalent basis). Net of taxes, this should allow real incomes to edge up slightly. Given some pick-up in employment growth and gains from newly-introduced child care benefits, net disposable income adjusted for inflation should resume its upward trend. Private consumption in 2002 is projected to maintain the pace of 2001, and household saving as percent of disposable income should remain stable.

Table 5: Earnings and international competitiveness
	1997	1998	1999	2000	2001	2002
	Percentage changes from previous year
Gross earnings per employee1	+0.7	+3.0	+2.0	+2.2	+2.7	+2.8
Full-time equivalent	+1.3	+3.6	+3.0	+2.7	+3.1	+3.2
Gross real earnings per employee	-0.8	+2.5	+1.2	+0.3	+0.1	+0.9
Net real earnings per employee	-2.4	+2.3	+1.0	+0.8	-0.8	+0.4
Net wages and salaries	-0.3	+3.3	+3.7	+4.1	+2.1	+3.2
Unit labour costs
Total economy	+0.2	+0.7	+0.9	+0.1	+1.6	+1.0
Manufacturing	-4.4	-1.7	-0.5	-6.0	-0.2	-0.5
Relative unit labour costs2
Vis-à-vis trading partners	-3.9	-0.6	-1.5	-5.9	+0.6	-0.7
Vis-à-vis Germany	+0.8	+0.4	-0.1	-2.6	-0.2	-0.9
Effective exchange rate - manufactures
Nominal	-1.8	+2.5	+0.6	-2.7	+1.2	+0.4
Real	-4.3	+0.5	-1.3	-3.4	+1.1	+0.1
1 According to National Accounts. - ^2 Manufacturing, in a common currency; minus sign indicates improvement of competitiveness.

[24] Growth of domestic trade (measured by the sector's contribution to GDP) is set to slow significantly, from 3 percent p.a. in 1999-2000 to 1½ percent in 2001. The main reason is a likely stagnation in wholesale trade, as a consequence of slackening foreign trade and private investment. Sales of motor vehicles are also sluggish, whereas retail sales appear more lively. Some pick-up in growth may be expected for 2002.

Sluggish demand for construction

[25] From January to May 2001, employment in the construction sector was markedly lower than over the same period of last year, suggesting sluggish output developments. This particularly concerns new home building, where the number of new subsidies granted and that of dwellings completed are declining due to lack of demand. Communal civil engineering is suffering from severe financial constraints of municipalities. Construction of industrial structures is losing momentum in parallel with private investment. New office building activity is faring relatively better, as in this area demand continues to be lively.

[26] On average 2001, construction output may only be expected to gain ½ percent at the most. Prospects for next year are not significantly better, with housing demand set to recede further and financial restraint of public authorities being upheld. Nevertheless, construction investment in Austria, when taken as a ratio of GDP, is still clearly above the European average, which reflects a major structural problem of the Austrian economy: the weight of construction investment increased when compared with other EU countries, particularly during the 1990's, while investment in information and communication technologies as well as other innovation were lagging behind.

Stubborn inflation

Headline inflation will rise to an average annual rate of 2.6 percent this year. The pass-through of higher energy costs to output prices and the increase in indirect taxes and public charges are the main factors behind the strong upward momentum.

[27] Three months ago, WIFO has clearly underestimated the ongoing upward pressure on prices. From January to May, consumer prices went up by 3 percent year-on-year. As generally in Europe, energy costs and meat prices were the main drivers of inflation; in Austria, an additional contribution came from higher indirect taxes and public charges. Oil prices have not eased to the extent anticipated, and also the assumed rise of the euro against the dollar, which would have held down import prices, did not materialise. The rise in energy costs is passed on to final prices of manufactures and transportation services to a larger extent than expected. Yet, second-round spill-overs to wages and salaries have been hardly observed so far.

[28] As from June 2001, the hefty increases in the energy and motor car taxes and part of the rise in public charges, which together have added ½ percentage point to the inflation rate, will no longer show up in the annual comparison. In the second half of the year, energy prices should come down. Both factors should make for lower headline inflation. However, housing costs are going up notably, manufactures' prices may rise by 2 percent from last year, and the increase in services prices has shown no sign of abating. The annual average rate of inflation is projected at 2.6 percent. In 2002, food prices should no longer exert upward pressure, and that from energy costs should subside further, such that the overall inflation rate may moderate to 1.9 percent. Core inflation (excluding food and energy), projected at 2.9 (2001) and 2.4 percent (2002), would in both years exceed headline inflation.

No further fall in unemployment

The cyclical slowdown is putting a brake on employment growth and the decline in unemployment. Improvement on the labour market is also being constrained by rationalisation efforts in the public sector and of utility companies. Total unemployment is expected at 190,000 over the projection period, bringing the downward trend to a halt.

[29] The upward trend in employment has become flatter this year. While in January, the year-on-year gain stood at 26,000 (excluding people on maternity leave and in compulsory military service), it had shrunk to 13,000 by April and May. The slowdown mainly reflects job cuts in the construction and the transport and telecommunication sector during spring. Employment is also falling notably in public administration, while in manufacturing sizeable gains (on an annual basis) have been confirmed by recent incoming data. On average 2001, the number of dependent employees may exceed the year-earlier level by 13,000 or 0.4 percent.

[30] Labour supply is shaped by trends going in different directions. The population of working age (15 to 59 years old) is declining for demographic reasons, by 20,000 and 9,000 this year and next. At the same time, the labour force participation ratio is rising by around ½ percentage point per year, not least because of foreigners having been in Austria long enough to qualify for a work permit (to a large part women of younger and middle age). The introduction of new child care benefits as from 2002 on the one hand lowers work incentives for women, but should raise part-time work of men or women on the other, since the earnings ceilings attached to the new benefits are rather generous.

Table 6: Labour market
	1997	1998	1999	2000	2001	2002
	Changes from previous year, in 1,000
Demand for labour
Civilian employment	+8.8	+22.1	+32.2	+27.7	+16.2	+26.6
Excluding parental leave and military service	+13.3	+30.8	+38.2	+30.8	+14.9	+17.1
Dependent employment1	+8.3	+21.1	+31.2	+25.8	+14.2	+24.5
Excluding parental leave and military service	+12.8	+29.8	+37.2	+28.9	+12.9	+15.0
Percentage changes from previous year	+0.4	+1.0	+1.2	+1.0	+0.4	+0.5
Parental leave and military service1	-4.4	-8.7	-6.0	-3.1	+1.2	+9.5
Foreign workers	-1.6	-0.2	+7.8	+13.4	+9.1	+6.0
Self-employed2	+0.5	+1.0	+1.0	+1.9	+2.0	+2.1
Labour supply
Economically active population (15-64)	+13.5	+11.0	+19.8	+23.1	+20.5	+19.5
(15-59)	+20.3	+10.9	-2.6	-19.3	-20.6	-8.6
Total labour force	+11.7	+26.5	+16.2	+0.3	+13.1	+26.3
Excluding parental leave and military service	+16.1	+35.2	+22.2	+3.4	+11.9	+16.8
Foreign	-1.7	+0.7	+6.6	+12.0	+13.0	+8.0
Migration of nationals	+5.4	+3.9	+3.0	-3.0	-1.0	±0.0
Indigenous	+8.0	+21.9	+6.6	-8.7	+1.1	+18.3
Excluding parental leave and military service	+12.4	+30.6	+12.6	-5.6	-0.1	+8.8
Surplus of labour
Registered unemployed3	+2.8	+4.4	-16.1	-27.4	-3.0	-0.3
in 1,000	233.3	237.8	221.7	194.3	191.3	191.0
Unemployment rate
Percent of total labour force^4 in percent	4.4	4.5	4.0	3.7	3.6	3.6
Percent of total labour force^3 in percent	6.4	6.5	6.0	5.3	5.2	5.1
Percent of dependent labour force^3 in percent	7.1	7.2	6.7	5.8	5.7	5.7
Participation rate5	67.2	67.6	67.6	67.4	67.4	67.6
Excluding parental leave and military service^6	70.2	70.7	71.2	71.6	72.1	72.5
Employment rate7	62.9	63.2	63.6	63.8	63.9	64.1
Excluding parental leave and military service^6	65.6	66.1	66.9	67.7	68.3	68.8
1 According to Association of Austrian Social Security Institutions. - ^2 According to WIFO. - ^3 According to Labour Market Service. - ^4 According to Eurostat. - ^5 Total labour force as a percentage of active population (aged 15 to 64). - ^6 As a percentage of population aged 15 to 69. ^7  Employment as a percentage of active population (aged 15 to 64).

Figure 2: Economic performance

¹ Excluding parental leave and military service.

[31] The number of registered unemployed in 2001 may edge down by 3,000 to an average 191,000, corresponding to a jobless rate of 3.6 percent of the labour force on Eurostat definitions, or 5.7 percent of the dependent labour force, following the conventional national calculation method. Next year, employment growth should pick up somewhat on the assumption of economic growth re-gaining momentum. The number of unemployed and the unemployment rates will remain broadly unchanged from this year.

Government budget hit by slower growth, but benefiting from inflation

[32] The marked slowdown of economic activity in 2001 is having an adverse impact on public finances. While the revisions to the projections mainly concern exports and investment, output and employment will be dampened in the following, and unemployment will no longer recede. This could reduce revenues from wage tax already this year and those from corporate tax in one or two years' time. Unemployment insurance will likely be faced with higher claims than budgeted. Inflation is distinctly higher than underlying the budget projections and may lead to higher expenditure on retirement benefits next year. The general government deficit for 2001 is expected at a ratio of 0.5 percent of GDP and thus lower than assumed by the Ministry of Finance.

[33] The outlook for the Federal budget 2002 has not essentially deteriorated as a consequence of the revisions to the projections. Real GDP growth is still expected at 2 percent or more, and higher inflation should rather work towards a lower deficit: indirect tax revenues will be boosted, and also wage tax revenues may grow more than expected.

[34] Whether the "zero-deficit" general government balance, as aimed-for by the Federal government, will actually be achieved will depend less on cyclical developments, but rather on large-scale transfers "off budget" of public activities (and the related expenditures and deficits), and whether such transfers will be officially recognised by Eurostat. This concerns in particular the Federal real estate agency, the State hospitals, and the housing promotion scheme. In the event, however, of demand and output turning out weaker still than in the present projections, and nominal GDP significantly lower, a balanced budget would then become rather unrealistic. Fiscal policy should in that case not respond to the shortfall in tax revenues by additional cuts in expenditure. Rather, it should accept the budget deficit resulting from the full operation of automatic stabilisers.

Table 7: Key policy indicators
	1997	1998	1999	2000	2001	2002
Fiscal policy
	Billion ATS
Central government net balance	-67.8	-75.9	-64.5	-40.0	-36.0	-23.0
	As a percentage of GDP
Central government net balance	-2.7	-2.9	-2.4	-1.4	-1.2	-0.75
General government financial balance	-1.7	-2.2	-2.1	-1.1	-0.5	±0.0
General government primary balance	2.2	1.5	1.5	2.4	3.0	3.4
Monetary policy
	In percent
3-month interest rate	3.5	3.6	3.0	4.4	4.4	4.0
Long-term interest rate1	5.7	4.7	4.7	5.6	5.2	5.0
	Percentage changes from previous year
Effective exchange rate
Nominal	-1.7	+2.8	+1.5	-2.4	+1.4	+0.4
Real	-4.6	+0.3	-1.1	-3.5	+1.1	-0.1
^1  10-year central government bonds (benchmark).

Cut-off date: 27 June 2001