Heightened Uncertainty Weighing Upon Activity

Economic Outlook for 2012 and 2013

While short-term prospects for the Austrian economy have weakened since last June's forecast revision, the pattern of risks is somewhat uneven as external downward risks slightly dominate domestic upward risks. Against this background, Austria's GDP is expected to grow by 0.6 percent in 2012 and by 1.0 percent in 2013, with the latter figure being subject to particular uncertainty.

All staff members of the Austrian Institute of Economic Research contribute to the Economic Outlook. Data processing: Nora Popp, Roswitha Übl • Cut-off date: 26 September 2012. • E-mail address: Christian.Glocker@wifo.ac.at

CONTENT

Global economic growth losing momentum

Euro area economy still caught in recession

Austrian economy overshadowed by global sluggishness

Weakening signals from leading indicators

External downside risks dominating domestic upside risks

Exports constrained by confidence and debt crisis in the euro area

Investment providing modest growth stimulus

Growth of private consumption remaining moderate

Strong employment gains, but jobless rate heading up

Headline inflation slightly above 2 percent

Financing conditions in Austria remain favourable

Low financing cost relieving public budgets

LIST OF TABLES AND FIGURES

Table 1: Main results. 4

Table 2: World economy. 5

Table 3: Productivity. 9

Table 4: Earnings and international competitiveness. 14

Table 5: Private consumption, income and prices. 15

Table 6: Labour market 16

Table 7: Key policy indicators. 19

Figure 1: Indicators of economic performance. 11

After a temporary revival early this year, growth of the world economy slackened markedly in spring, affecting the major industrialised countries as well as many emerging markets. The debt and confidence crisis in the euro area is only partly responsible for the slowdown. Indeed, many advanced economies outside the euro area are characterised by substantial macroeconomic imbalances and have to cope with economic misalignments in a similar way as the southern European periphery. Moreover, in several emerging markets, internal problems have lately come to the fore.

The downturn of global activity and the renewed aggravation of the sovereign debt crisis in the euro area have shaped the trend on international financial markets since spring. The Spanish banking system and government households in several euro-area countries have been the focus of European concerns. While financing conditions kept worsening for banks and governments in southern Europe, capital flows towards "safe havens" reduced bond yields particularly in Germany, Finland, the Netherlands and Austria. This divergence was mirrored by extraordinarily high risk premia on secondary markets for government bonds. As a reaction, the European Central Bank (ECB) in early September decided to retain the option of unlimited sovereign bond purchases in the context of Outright Monetary Transactions (OMT). Immediately after this announcement, interest rate spreads of southern European government bonds narrowed markedly on secondary markets. The unlimited OMT of the ECB are expected to strengthen at least temporarily market confidence in the stability of the euro and rein in capital outflows from southern Europe. In such an environment, conditions for growth in Europe at large may gradually improve during 2013. For 2012, WIFO expects a decline in demand and output for the euro area overall, followed by a moderate recovery in 2013.

Austria's economy cannot entirely decouple from the international trend, as witnessed by the stagnation of exports since the middle of 2011. However, unlike during the peak of the crisis in 2009, domestic demand proved rather resilient. The current WIFO projection expects Austria's GDP to grow by 0.6 percent in 2012. In 2013, with a projected growth rate of 1.0 percent, Austria should remain among the leaders of recovery in the euro area. Compared with the forecast of last June, WIFO has somewhat reduced its growth outlook for 2013 on account of the weaker international environment.

While short-term prospects for the Austrian economy have weakened since last June's forecast revision, the pattern of risks is somewhat uneven. Current external developments in particular carry important risks for the domestic financial sector as well as for the real economy. A rather positive element is the robust labour demand in Austria. On the basis of the trend since the beginning of the year, employment is set to increase by 1.5 percent for the whole of 2012, abating to +0.5 percent in 2013. The rate of unemployment will nevertheless rise to 7.0 percent this year (according to the conventional national definition) and move further up in 2013.


Table 1: Main results

	2008	2009	2010	2011	2012	2013
	Percentage changes from previous year
GDP
Volume	+1.4	–3.8	+2.1	+2.7	+0.6	+1.0
Value	+3.2	–2.3	+3.7	+5.0	+2.5	+2.6

Manufacturing¹, volume	+1.1	–12.7	+7.0	+8.2	+0.5	+2.5

Wholesale and retail trade, volume	–2.1	–0.3	+1.4	+1.3	–0.4	+0.5

Private consumption expenditure, volume	+0.7	+1.1	+1.7	+0.7	+0.6	+0.7

Gross fixed investment, volume	+0.7	–7.8	+0.8	+7.3	+1.1	+1.5
Machinery and equipment	–0.4	–10.6	+6.0	+12.1	+1.0	+2.5
Construction	+0.9	–7.1	–2.7	+4.4	+1.1	+0.6

Exports of goods2
Volume	+0.5	–18.3	+13.0	+7.9	+0.8	+4.3
Value	+2.5	–20.2	+16.7	+11.3	+1.7	+4.5

Imports of goods²
Volume	+0.6	–14.1	+10.9	+8.5	–0.3	+4.0
Value	+4.7	–18.4	+16.5	+15.3	+1.0	+4.5

Current balance billion €	+13.76	+7.49	+8.62	+5.86	+6.95	+8.14
As a percentage of GDP	+4.9	+2.7	+3.0	+1.9	+2.3	+2.6

Long-term interest rate³ percent	4.4	3.9	3.2	3.3	2.4	2.0

Consumer prices	+3.2	+0.5	+1.9	+3.3	+2.3	+2.1

Unemployment rate
Eurostat definition⁴ percent	3.8	4.8	4.4	4.2	4.4	4.8
National definition5 percent	5.9	7.2	6.9	6.7	7.0	7.4

Persons in active dependent employment⁶	+1.7	–1.5	+0.8	+1.9	+1.5	+0.5

General government financial balance according to Maastricht definition
As a percentage of GDP	–0.9	–4.1	–4.5	–2.6	–2.9	–2.6
Source: WIFO Economic Outlook. – 1 Value added, including mining and quarrying. – ² According to Statistics Austria. – ³ 10-year central government bonds (benchmark). – ⁴ According to Eurostat Labour Force Survey. – ⁵ According to Public Employment Service Austria, as a percentage of total labour force excluding self employed. – ⁶ Excluding parental leave, military service.

Global economic growth losing momentum

In the first quarter 2012, the world economy expanded by 3.6 percent[a], significantly more strongly than anticipated. A large part of this positive result is due to temporary factors like lower financing cost or some regain in confidence in reaction to the measures taken by the ECB early this year. In the following three months, however, global activity slackened markedly. In particular, increasing strain on European financial markets added to market volatility worldwide and dampened international trade. Many advanced economies outside the euro area also suffer from major macroeconomic imbalances and have to address economic misalignments in a similar way as the southern European periphery. Moreover, in several emerging markets, growth-impeding frictions have lately come to the fore.

Despite a strong rise of employment in July, the US jobless rate remains above 8 percent. On the real estate market, conditions are stabilising. The Federal Reserve is taking further stimulating action.

In the USA, the underlying cyclical trend has been stable in the first half of 2012, but demand and output have clearly lost momentum from last year. Private consumption has been the major support to growth in the first and second quarter 2012. With the private saving ratio moving up steadily since the beginning of the year as households unwind their debt positions, consumption growth should remain below its long-term trend over the projection period.

Only half of the more than 8 million jobs lost during the financial market crisis have been made up so far. Against this background, the Federal Reserve launched in mid-September a further comprehensive programme to stimulate the economy[b]. In addition, the Fed announced to keep its key policy rate close to zero until at least mid-2015, thereby extending the horizon by half a year in order to confirm the signalling effect of low interest rates.


Table 2: World economy

	2008	2009	2010	2011	2012	2013
	Percentage changes from previous year
Real GDP
World	+2.8	–0.7	+5.3	+3.9	+3.1	+3.3
USA	–0.3	–3.1	+2.4	+1.8	+2.2	+1.8
Japan	–1.0	–5.5	+4.5	–0.8	+1.4	+1.5
EU 27	+0.3	–4.3	+2.1	+1.5	–0.2	+0.6
Euro area 16	+0.4	–4.4	+2.0	+1.4	–0.4	+0.4
Germany	+1.1	–5.1	+4.2	+3.1	+0.8	+1.1
New EU countries1	+4.2	–3.2	+2.3	+3.2	+1.3	+2.1
China	+9.6	+9.2	+10.4	+9.3	+8.0	+7.0

World trade, volume	+2.3	–12.7	+15.2	+5.8	+3.5	+4.8

Market growth²	+3.0	–11.4	+11.7	+6.1	+1.8	+4.0

Primary commodity prices
HWWI index, total	+32.7	–34.7	+28.9	+28.6	–4	+3
Excluding energy	+18.7	–28.4	+31.9	+19.2	–15	+15

Crude oil prices
Brent, $ per barrel	97.0	61.5	79.5	111.3	110	110

Exchange rate
$ per euro	1.471	1.393	1.327	1.392	1.25	1.25
Source: WIFO Economic Outlook. – ¹ Bulgaria, Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania. – ² Real import growth of trading partners weighted by Austrian export shares.

This policy measure does not come as a surprise, given the general picture suggested by the leading indicators. Business and private household sentiment slightly slipped back over the last few months after signs of a strengthening recovery observed early this year. Uncertainty about the course of fiscal policy next year may act as a drag on confidence. The rise in industrial output and in capacity utilisation has stalled lately. More positive signals come from the real estate market where the Case-Shiller Index and other indicators point to a stabilisation of house prices.

In the remainder of 2012, US growth should not decelerate significantly. The stable economic climate should primarily favour private consumption. WIFO expects real GDP growth for the whole year at 2.2 percent. In 2013, at least fiscal policy is likely to turn more restrictive in view of persistent high deficits. As a consequence, GDP growth will moderate to a projected rate of 1.8 percent. Yet, the US policy stance remains distinctly more expansionary than in the euro area. The US key interest rate is consistently lower, and the general government deficit for 2012 is expected at 8 percent of GDP, as compared with 3 percent in the euro area. The growth momentum of the US economy is thus considerably stronger than that of the euro area, though clearly weaker than in the past.

In several emerging markets in Asia and Latin America, leading indicators foreshadow a cyclical slowdown of activity.

Due to weaker demand from the euro area, the emerging markets in Latin America saw a slackening of export growth in the first half of 2012. At the same time, capital inflows to these countries were highly volatile, weighing on financial markets and credit supply. Most central banks in the region, notably in Brazil, responded by stepwise cuts in interest rates. In addition, macroprudential regulations were tightened in order to secure financial market stability. Monetary policy over the forecast period should be substantially less restrictive than in summer 2011 which, together with continued strong private income gains, should provide a significant boost to internal demand.

The Chinese economy has lost a good deal of momentum since early 2012. Subdued investment and weaker foreign demand reflecting the euro area crisis were largely responsible for the slowdown. Growth should remain below the pace of 2010 and 2011 also in the second half of 2012, as suggested by the majority of leading indicators. Investment should provide the strongest growth contribution, largely driven by public subsidies. Private consumption will be kept on an upward path by sustained increases in per-capita income. Like for China, early indicators for a number of other Asian emerging markets point to a gradual weakening of the hitherto strong pace of growth. These economies enjoy increasing trade relations with China as well as among each other. Accordingly, growth of emerging Asia will remain significantly stronger than that of the advanced economies over the forecast horizon.

Euro area economy still caught in recession

In the EU, the loss of confidence in public finances and the banking system as well as the drastic consolidation programmes adopted in many countries still weigh on economic activity. Despite the latest ECB decision on potentially unlimited government bond purchases in the context of the Outright Monetary Transactions (OMT) programme, bond yields for Ireland and most southern European countries remain high, complicating a lasting stabilisation of government debt. Persistent uncertainty on the part of private households and companies is clouding the business outlook.

Since the third quarter 2011, the euro area is de facto in recession, mainly deriving from a marked decline in private domestic demand. The latter is undermined by the uncertain outlook caused by the worsening of the European government debt crisis and reinforced by sweeping fiscal restriction. Foreign trade has so far still provided slightly positive contributions to GDP growth, albeit due to the downturn of imports outpacing that of exports. The setback of imports is a direct consequence of sluggish domestic demand.

The cyclical profile is increasingly uneven across euro area countries. Thus Greece, Ireland, Portugal, Spain and Italy were obliged to strengthen consolidation efforts step by step[c] as pressure from financial markets mounted or because original budgetary targets were missed on account of the recession. Also bank lending was markedly more restrictive in the crisis countries than in the rest of EMU as banks there suffered not only from heavy losses of bond values, but also from high macro-financial risks.

The aggravation of the European sovereign debt crisis and the tightening of fiscal restriction also shape developments on labour markets: the euro area unemployment rate climbed from 10.0 percent in June 2011 to 11.3 percent in July 2012. Here again, the trend was not uniform across countries. In countries with rather flexible labour markets, favourable supply structure and sound public and private finances (Germany and Finland), unemployment trended slightly down over the last twelve months, whereas it rose sharply in the structurally weak southern periphery (Greece, Portugal, Spain and Italy).

Severe fiscal retrenchment, high uncertainty and major structural problems in many member countries will further act as a drag on domestic demand. The recently adopted Outright Monetary Transactions (OMT) programme of the ECB for unlimited government bond purchases is unlikely to reduce the cyclical asymmetry within the euro area in a lasting way. In an immediate reaction, however, returns on government bonds of southern euro area countries fell significantly after the announcement of the new measures[d].

In such an environment, a tentative cyclical recovery may take hold during 2013 also in Europe. After a decline in euro area GDP in 2012, WIFO expects a moderate pick-up of activity for 2013.

Austrian economy overshadowed by global sluggishness

In spite of a marked slowdown of growth in the second quarter from the previous period, domestic demand and output are holding up rather well against the background of the recession in the euro area. Uncertainty emanating from the euro area crisis and widespread fiscal consolidation hold back exports to the EU countries.

Like in Germany, the Austrian economy has so far managed to largely withstand the euro area crisis. According to preliminary data, GDP rose by 0.5 percent in the first quarter from the earlier period, followed by +0.1 percent in the second quarter. Developments in the first semester were shaped by stable consumer demand and robust investment. Net exports provided a significant positive growth contribution in the first quarter, but no longer so in the second period when imports picked up markedly. Thus, GDP growth in the first half of the year was supported both by internal and, albeit noticeably less, by foreign demand. The Austrian economy therefore acted as a stabiliser of the Euro Area Business Cycle.


Table 3: Productivity

	2008	2009	2010	2011	2012	2013
	Percentage changes from previous year
Total economy
Real GDP	+1.4	–3.8	+2.1	+2.7	+0.6	+1.0
Employment¹	+2.1	–0.9	+0.7	+1.8	+1.4	+0.7
Productivity (GDP per employment)	–0.7	–2.9	+1.4	+0.9	–0.9	+0.3

Manufacturing
Production2	+0.7	–13.0	+7.2	+8.5	+0.5	+2.5
Employees3	+1.7	–5.3	–1.3	+1.9	+1.8	+0.3
Productivity per hour	–0.5	–4.7	+5.4	+6.7	+0.2	+1.7
Working hours per day per employee4	–0.5	–3.5	+3.0	–0.1	–1.5	+0.5
Source: WIFO Economic Outlook. – 1 Dependent and self-employed according to National Accounts definition. – ² Value added, volume. – ³ According to Federation of Austrian Social Security Institutions. – ⁴ According to "Konjunkturerhebung" of Statistics Austria.

The last few months did not see a major global macroeconomic shock that would not have been incorporated in the WIFO projection of end-June. As assumed at the time, the latest revision anticipates a gradual fading of the European confidence crisis and a return to normal conditions both in Austria and the euro area. Yet, the resumption of growth will by no means proceed in a linear way: while the interest rate differential on euro area government bonds has narrowed, latest confidence indicators point to a resurgence of uncertainty.

Weakening signals from leading indicators

The general picture of leading cyclical indicators has for the last several months been characterised by a significant downturn. In the regular WIFO Business Cycle Survey, firms' judgements on the current situation and their short-term expectations are consistently negative in almost all branches. Only construction firms see the present situation on the whole positive and expectations are still above the long-term average, although by a narrowing margin. After a seasonally-adjusted increase in April and May, industrial output dropped markedly in July. Incoming orders, overall as well as those from abroad, have followed a downward trend since mid-2011.

The major confidence indicators have recently weakened significantly. Bank Austria's Purchasing Managers Index fell in August to its lowest level since the middle of 2009 and signalled a contraction of industrial output for the second month in a row. The Economic Sentiment Indicator of the European Commission receded in August for the third consecutive month.

External downside risks dominating domestic upside risks

Macroeconomic uncertainty over the forecast horizon is likely to be substantially larger than on long-term average and may weigh on developments in Austria: indeed, in an environment considered highly uncertain, many firms will be tempted to postpone investment projects and households will increase precautionary saving at the expense of current spending. Moreover, higher uncertainty typically leads to reduced credit supply and tighter lending standards.

Figure 1: Indicators of economic performance

Growth of real GDP	Employment and unemployment
Percent	1,000 from previous year

Source: WIFO Economic Outlook. – ¹ Excluding parental leave, military service, and unemployed persons in training. – ² 10-year central government bonds (benchmark).

While short-term prospects for the Austrian economy have worsened since last June's forecast revision, the pattern of risks is somewhat uneven. Although early indicators draw a rather gloomy picture due to the persistent euro area crisis, domestic risks for business activity are slightly positive. Continuing robust employment growth should strengthen the wage and salary bill and disposable income and may support private consumption if the private saving ratio remains at the present low level. Investment is also subject to upward risks, on account of favourable financing conditions as well as healthy corporate balance sheets.

External risks to growth, however, are clearly pointing down. Current international trends hold further dangers both for the domestic financial sector and for the real economy. In particular the sluggishness of domestic demand in key foreign markets dampens the export outlook.

Against this background, WIFO expects Austrian GDP to edge up by 0.6 percent in 2012, unchanged from the previous forecast of last June. However, the outlook for 2013 has weakened and the projection for GDP growth is taken down to 1.0 percent. Nevertheless, WIFO still assumes that the euro area countries will take effective action to address the current problems considering not only the short-term, but also the long-term perspective, thereby restoring private sector confidence and paving the way for a cyclical upturn.

Exports constrained by confidence and debt crisis in the euro area

Austria's exports fared particularly strongly after the deep recession of 2009, as demand both from the EU and from third countries rebounded swiftly. Slower growth and rising unemployment in the wake of the lasting government debt crisis and consolidation efforts in the euro area had dampening effects via trade linkages also for the domestic economy. Still sizeable export gains in third countries fail to fully offset losses on EU markets.

According to the August 2012 reading of the export indicator of Oesterreichische Nationalbank (OeNB), nominal goods exports follow a slow upward trend. While the recession in key European markets like Italy, Czech Republic or Hungary has a strong dampening impact, deliveries to third countries perform markedly better.

The present forecast rests on the assumption that the causes of the confidence crisis will steadily wane over the period with profound economic adjustment taking place. The international cyclical recovery should stimulate exports mainly in 2013 (+4.2 percent in volume), after a subdued increase of 0.8 percent in 2012.

Import volumes remained flat in the first quarter 2012, probably under the impact of high energy prices, notably for imported oil, which may have encouraged substitution of investment and consumer goods imports by cuts in inventories. In the second quarter, imports edged up by 0.3 percent from the previous period. For the whole year 2012, WIFO expects imports to advance by only 0.5 percent in volume, due to subdued domestic demand and sluggish exports[e]. With the cyclical upturn in 2013, imports will regain momentum to a projected increase by 3.7 percent in volume.

The terms-of-trade[f] weakened in the first quarter 2012, mainly due to heavy price increases for imported energy. With energy prices levelling off thereafter, terms-of-trade losses were smaller in the second quarter. However, the negative trend will continue in the remainder of the year, given the price hikes for industrial commodities and oil since early June. Under the assumptions for the international business cycle, terms-of-trade changes are set to be small in both 2012 and 2013, implying a strengthening in Austria's price competitiveness. By way of a temporary price effect, a decline in the terms-of-trade will weaken the merchandise trade balance, before the volume effect turns the trade balance to a positive swing.

Investment providing modest growth stimulus

The sharp fall of investment during the financial market crisis created considerable pent-up demand, giving rise to a strong investment cycle since 2010. In 2011, gross fixed capital formation rose by 7.3 percent, purchases of machinery and equipment even by 12.1 percent. Several supporting factors played a role: satisfactory corporate earnings, relatively low external financing cost, the need for replacement after two years of investment restraint, and in particular the above-average capacity utilisation with favourable business conditions and prospects. In this situation, firms not only renewed, but also enlarged their productive capital stock.

The projection of investment is currently complicated by several factors pulling in different directions:

· On the one hand, the slowdown of external demand since the middle of 2011 weakens sales prospects and spares companies the need for capacity enlargement. Given the latest resurgence of uncertainty, firms will postpone investment projects. Moreover, after the investment boom of the last two years, saturation effects are increasingly emerging. From this perspective, some deceleration of momentum should be expected.

· On the other hand, favourable financing conditions, both from cash-flow and from credit conditions, are conducive to stronger corporate capital formation.

Against this background, WIFO projects a continued investment increase that is nevertheless below the long-term trend and implies a slowdown from the pace of the last years (i.e., gross fixed capital formation 2012 +1.1 percent, 2013 +1.5 percent). Assuming a stepwise resolution of the euro area crisis in the next few years, firms can be expected to quickly catch up on postponed investment projects. With cuts in inventories continuing, gross investment will expand at a lower rate. The projection of muted investment in 2012 is confirmed by the results from the WIFO Investment Survey: in spring 2012, 44 percent of the manufacturing firms sampled envisaged a reduction of investment from last year, while 48 percent planned an increase and 8 percent wanted to keep investment spending constant.

Public investment will be shaped by the need for fiscal consolidation at all government levels over the entire forecast period. However, this component accounts for only 5 percent of total investment.

Growth of private consumption remaining moderate

The sluggish growth of real private consumption observed throughout 2011 continued into the first half of 2012. In 2011, exceptionally strong inflation and the implicit squeeze on real disposable household income were the determining factors. In the second quarter 2012, private consumption stagnated for the second period in a row. Since leading consumption indicators fail to signal a turnaround, anaemic growth is set to continue in coming months. This is confirmed by the significant drop of the consumer confidence indicator from the business survey of the European Commission. Also the psychological aspects of the crisis are increasingly felt: uncertainty about the survival of Monetary Union in its present form is growing, while the economic costs and consequences of a drop-out of Greece are often presented in a dramatic way. These elements create a high degree of uncertainty and reinforce the tendency of consumption restraint.


Table 4: Earnings and international competitiveness

	2008	2009	2010	2011	2012	2013
	Percentage changes from previous year

Gross earnings per employee¹	+3.2	+1.7	+1.0	+1.7	+3.2	+2.2
Gross real earnings per employee²	–0.0	+1.2	–0.8	–1.5	+0.9	+0.1
Net real earnings per employee²	–0.7	+3.0	–1.1	–2.0	+0.4	–0.2

Unit labour costs
Total economy	+3.6	+4.8	–0.3	+0.8	+4.1	+1.8
Manufacturing	+5.4	+11.5	–6.1	–3.9	+3.3	+0.0

Effective exchange rate, manufactures
Nominal	+1.1	+0.7	–2.6	+0.0	–1.3	+0.1
Real	+0.6	+0.4	–2.7	+0.7	–1.2	+0.5
Source: WIFO Economic Outlook. – 1 Employees according to National Accounts definition. – 2 Deflated by CPI.


Table 5: Private consumption, income and prices

	2008	2009	2010	2011	2012	2013
	Percentage changes from previous year

Private consumption expenditure	+0.7	+1.1	+1.7	+0.7	+0.6	+0.7
Durables	+3.3	+4.8	+2.3	+1.8	–2.2	±0.0
Non-durables and services	+0.4	+0.6	+1.6	+0.6	+0.9	+0.8
Household disposable income	+0.7	–1.5	–0.2	–1.0	+0.3	+0.8

	As a percentage of disposable income

Household saving ratio¹	11.5	10.7	8.3	7.5	7.3	7.5
Household saving ratio²	11.4	10.1	7.8	7.0	6.8	6.9

	Percentage changes from previous year

Direct lending to domestic non-banks³	+7.4	–1.3	+2.9	+2.6	+1.2	+2.1

	Percentage changes from previous year
Inflation rate
National	3.2	0.5	1.9	3.3	2.3	2.1
Harmonised	3.2	0.4	1.7	3.6	2.4	2.2
Core inflation4	2.4	1.5	1.2	2.8	2.2	2.0
Source: WIFO Economic Outlook. – ¹ Including adjustment for the change in net equity of households in pension fund reserves. – ² Excluding adjustment for the change in net equity of households in pension fund reserves. – ³ End of period. – ⁴ Excluding unprocessed food (meat, fish, fruits, vegetables) and energy items.

Positive effects on consumption may emanate from last year's relatively high wage settlements, healthy employment gains – together implying a strong increase in the wage bill – and the currently rather low private saving ratio. Admittedly, wage growth is being somewhat dampened by the continuing negative wage drift, just as labour demand has slackened from the boom in 2011. Nevertheless, employment is set to act, as in several instances in the past, as a stabiliser of private consumption and domestic demand.

Assuming a broadly stable household saving ratio, WIFO therefore projects, despite the impact of the fiscal consolidation measures, a gentle increase in private consumption by 0.6 percent in 2012 and 0.7 percent in 2013.

Strong employment gains, but jobless rate heading up

Despite the weak cyclical conditions, employment growth has so far been unabated. In the months to come, however, job creation is set to decelerate. Unemployment will stay on an upward path over the forecast horizon.

The sustained growth of employment is keeping up its pace. During the deep recession following the financial market crisis, the number of total hours worked in Austria declined only little, both by international and historical standards. The subsequent rebound of employment was accompanied until mid-2011 by a steady fall in unemployment. Since then, employment and unemployment numbers are moving up in parallel.

Also for the whole year 2012, job creation will be above the long-term average (persons in dependent active employment +1.5 percent), before moderating in 2013 (+0.5 percent).

The strong expansion of labour supply by 66,400 persons in 2011 accelerated to 69,000 on annual average in 2012, but slackened during the year and is projected at +40,000 for 2013. Since labour supply is more dynamic than what can be absorbed under current cyclical conditions, unemployment is rising despite new jobs being created in net terms. With growth remaining subdued and labour supply increasing, WIFO expects the rate of unemployment (in the Eurostat definition) to move up to 4.4 percent in 2012 and 4.8 percent in 2013. Drivers behind labour supply growth are the rise in labour force participation of female and older workers and the inflow of foreign workers, particularly from EU countries.

Headline inflation slightly above 2 percent

Food and energy prices headed up markedly in early 2011, followed in the subsequent months by services prices. Overall, HICP inflation rose to 3.6 percent in 2011, core inflation stood at 2.8 percent. Since the end of 2011, the year-on-year price increase has been narrowing, from almost 4 percent in September by 1.6 percentage points to 2.3 percent in August 2012. The deceleration was determined by prices of manufactures and food and, to a lesser extent, by energy prices. Core inflation also abated to 1.7 percent by last August.


Table 6: Labour market

	2008	2009	2010	2011	2012	2013
	Changes from previous year, in 1,000
Demand for labour
Persons in active employment¹	+66.0	–44.0	+31.3	+70.5	+55.0	+23.0
Employees²	+55.6	–48.5	+25.5	+63.3	+50.0	+18.0
Percentage changes from previous year	+1.7	–1.5	+0.8	+1.9	+1.5	+0.5
Nationals	+31.1	–43.0	+5.8	+25.7	+11.5	+1.0
Foreign workers	+24.5	–5.5	+19.7	+37.7	+38.5	+17.0
Self-employed3	+10.4	+4.5	+5.8	+7.2	+5.0	+5.0

Labour supply
Population of working age 15 to 64 years	+27.7	+17.3	+21.6	+37.0	+15.0	+6.7
15 to 59 years	+17.6	+11.1	+8.9	+17.1	+14.7	+10.8
Labour force⁴	+56.0	+4.0	+21.8	+66.4	+69.0	+40.0

Surplus of labour
Registered unemployed⁵	–10.0	+48.1	–9.5	–4.1	+14.0	+17.0
In 1,000	212.3	260.3	250.8	246.7	260.7	277.7
Unemployed persons in training⁵ in 1,000	50.5	64.1	73.2	63.2	65.7	68.7

	In percent
Unemployment rate
Eurostat definition⁶	3.8	4.8	4.4	4.2	4.4	4.8
As a percentage of total labour force⁵	5.3	6.5	6.2	6.0	6.3	6.6
National definition^{5, 7}	5.9	7.2	6.9	6.7	7.0	7.4

Employment rate
Persons in active employment^{1, 8}	65.7	64.7	65.0	65.9	66.6	67.0
Total employment^{6, 8}	72.1	71.6	71.7	72.1	72.5	72.8
Source: WIFO Economic Outlook. – ¹ Excluding parental leave, military service. – ² According to Federation of Austrian Social Security Institutions. – ³ According to WIFO. – ⁴ Persons in active employment plus unemployment. – ⁵ According to Public Employment Service Austria. – ⁶ According to Eurostat Labour Force Survey. – ⁷ As a percentage of total labour force, excluding self-employed. – ⁸ As a percentage of population of working age (15 to 64 years).

Nevertheless, consumer prices will keep lively upward momentum over the forecast period. First, domestic upward pressure is mounting, with unit labour cost rising particularly in 2012 and likely to feed into consumer prices despite the subdued consumer climate. Second, oil prices are expected to exert upward pressure. Prices of petrol and fossil fuels still add importantly to overall inflation. Although oil prices eased markedly on a dollar basis in the second quarter, they have trended up again since early July. Food prices are also likely to be a driver of inflation over the forecast period. World market prices for grain have already jumped in reaction to the drought in the USA. Due to price rises for animal feed, meat and dairy prices will also move up faster. Price inertia may keep food prices high until well into 2013.

Given these conditions, WIFO projects for 2012 an average HICP inflation rate of 2.4 percent (CPI 2.3 percent), edging down to 2.2 percent (CPI 2.1 percent) in 2013. Core inflation, as calculated according to the EU-wide harmonised method, will also moderate from 2.8 percent in 2011 to 2.2 percent in 2012 and 2.0 percent in 2013.

Financing conditions in Austria remain favourable

While the major domestic financial institutions meet the tightened equity capital standards of "Basel III", macro-financial risks have increased once again on account of economic developments in Central, Eastern and South-eastern Europe (CESEE countries). Several factors play a role in this regard. First, macroeconomic and cyclical risks have markedly reduced growth prospects for 2012. In almost all countries domestic demand is receding and is only partly offset by higher net exports. Risks in the CESEE region are notably exacerbated by the gloomy outlook for the euro area and the danger of negative cyclical surprises also in other parts of the world. Second, external risks and exchange rate volatility have increased markedly since 2011.

Financing conditions for domestic banks remain favourable, due inter alia to the ECB's strongly expansionary monetary policy stance. Short-term interest rates for 3-months inter-bank credit of 0.7 percent both in 2012 and 2013 are indeed low in a long-term comparison. Actual refinancing costs may be even lower as banks will wherever possible resort to cheap ECB funds. However, should the euro-area debt crisis get worse, domestic banks may still face heightened financing risks.

Thus, banks' macro-financial risks derive partly from the euro-area debt crisis and partly from credit defaults in eastern Europe. While in several countries in the region potential financing gaps (i.e., the discrepancy between outstanding credit and the stock of deposits) have already been reduced, this has largely occurred by non-Austrian banks running down their loan extension. Such deleveraging may create risks of its own for the real economy and have negative feedbacks for domestic banks.

Financing conditions on the domestic market are currently highly favourable, with no signs of a credit squeeze visible. WIFO expects credit volume in Austria to expand by 1.2 percent in 2012. Against the background of the poor economic outlook and further decline in borrowing cost, the modest rate of credit growth is explained by weak demand. The expected cyclical recovery in 2013 should accelerate credit growth to a projected rate of 2.1 percent.

Low financing cost relieving public budgets

Refinancing conditions are currently particularly favourable for government budgets. Since early 2012, yields on 10-year Austrian government bonds have eased significantly, mainly as a consequence of the aggravating government debt crisis in the euro area: rising demand for safe investment opportunities also benefited Austrian government securities that are considered to be of low risk. Thus, bond yields fell below the mark of 2 percent. For the entire year 2012, WIFO projects an average return of 2.4 percent and for 2013 2.0 percent. The benign trend lowers the refinancing cost for maturing bonds and relieves the burden on government budgets.


Table 7: Key policy indicators

	2008	2009	2010	2011	2012	2013
	As a percentage of GDP
Fiscal policy
General government financial balance
According to Maastricht definition	–0.9	–4.1	–4.5	–2.6	–2.9	–2.6
General government primary balance	+1.7	–1.3	–1.8	–0.0	–0.3	+0.0

	In percent
Monetary policy
3-month interest rate	4.6	1.2	0.8	1.4	0.7	0.7
Long-term interest rate2	4.4	3.9	3.2	3.3	2.4	2.0

	Percentage changes from previous year
Effective exchange rate
Nominal	+1.2	+0.9	–2.5	+0.1	–1.3	+0.1
Real	+0.6	+0.4	–2.7	+0.7	–1.3	+0.5
Source: WIFO Economic Outlook. – ¹ 10-year central government bonds (benchmark).

Apart from the lower refinancing cost, the surprisingly robust employment growth comes as a benefit by generating additional tax revenues and social security contributions. The WIFO projection is for a general government deficit of 2.9 percent of GDP in 2012, further heading down to 2.6 percent of GDP in 2013. Also for this projection, the forecast risk is tilted to the downside: both in 2012 and 2013, further liquidity support for the distressed nationalised banks may prove necessary, thereby increasing the budget deficit. On a separate aspect, it is questionable whether the planned additional revenue from the ex-ante taxation of contributions to occupational pension funds will actually materialise to full extent in 2012. Likewise, yields from some other revenue-related consolidation measures are subject to uncertainty.

Methodological Notes and Short Glossary

Period comparisons

Time-series comparisons with the previous period, e.g., the previous quarter, are adjusted for seasonal effects. They also include effects that result from a different number of working days in the period (e.g., Easter). In the text, reference is made to "seasonally and working day adjusted changes".

The phrase "changed compared with a year before . . .", on the other hand, describes a change compared with the same period a year before and refers to unadjusted time series.

The analysis of the seasonally and working day adjusted development provides more precise information about the actual course of economic activity and shows turning points sooner. However, the data are subject to additional revisions as seasonal adjustment is based on statistical methods.

Average rates of change

The time given refers to the initial and the final value of the period of computation: hence the average rate 2005-2010 comprises as the first rate of change that from 2005 to 2006, and as the last that from 2009 to 2010.

Real and nominal values

In principle, the values shown must be understood as real values, i.e., adjusted for price effects. Whenever values are shown as nominal values (e.g., foreign trade statistics), this is specifically mentioned.

Production Sector

This term comprises the NACE-2008 sections B, C and D (Mining and Quarrying, Manufacturing, Energy Supply) and is here used in an international comparison.

Inflation, CPI und HICP

The inflation rate measures changes in consumer prices compared with a year before. The Consumer Price Index (CPI) is a measure of national inflation. The Harmonised Index of Consumer Prices (HICP) is the basis for comparable measurement of inflation in the EU and for the evaluation of price stability in the euro area (see http://www.statistik.at/).

Core inflation as a monetary policy indicator is not clearly defined. WIFO follows the common practice of using the inflation rate excluding the product categories unprocessed food and energy for core inflation. Thus just under 87 percent of the goods and services contained in the consumer price index (CPI 2010) are included in the calculation of core inflation.

WIFO Business Cycle Survey and WIFO Investment Survey

The WIFO Business Cycle Survey is a monthly survey in which around 1,100 Austrian firms are asked to assess their current and future economic situation. The WIFO Investment Survey is conducted twice a year, asking companies about their investment activity (http://www.konjunkturtest.at/). The indicators are balances between the positive and negative responses expressed as a percentage of the total number of firms sampled.

Unemployment rate

Austrian national definition: The number of persons registered as job seekers with the Public Employment Service expressed as a percentage of the dependent labour force. Labour force is the sum of the unemployed and the persons in dependent employment (measured in standard employment relationships). Database: registrations with the Public Employment Service (AMS) and Association of Austrian social insurance agencies.

Definition according to ILO and Eurostat: Any person who is not gainfully employed and is actively seeking work is considered unemployed. Gainfully employed persons comprise all persons who during the reference week worked for at least one hour in a self-employed capacity or in paid employment. Persons receiving child-care benefit and apprentices are classified as gainfully employed, whereas persons in military service or persons carrying out alternative service are not. The unemployment rate is the number of unemployed persons expressed as a percentage of the total labour force (unemployed persons plus gainfully employed persons). Database: data from household surveys ("Mikrozensus").

Terms used in connection with the national definition of the unemployment rate

Persons in training: Persons who at a set date are enrolled in AMS (Public Employment Service) training programmes. When calculating the unemployment rate, their number is not taken into account either in the denominator or in the numerator.

Persons in dependent active employment: "Persons in dependent employment" include persons receiving child-care benefit, as well as persons in military service or persons carrying out alternative service with a valid employment contract. By deducting their number one arrives at the number of "persons in dependent active employment".