The OeNB now assesses the growth prospects for the first half of 2005 somewhat more cautiously than indicated by the OeNB’s economic indicator published in January 2005. The slowdown in economic growth is, however, expected to be of a temporary nature only; the economic outlook for the remainder of 2005 is more optimistic. The OeNB’s economic indicator forecasts 0.4% seasonally adjusted growth in Austria’s real GDP for the first and 0.5% for the second quarter of 2005 (each compared with the previous quarter). Compared with the most recent release of January 2005, the growth expectations for the first quarter 2005 were reduced by 0.2 percentage point. Year on year, this points to a slight contraction of economic growth in the first two quarters of 2005 from 2.2% to 2.0%.
OeNB Revises Economic Outlook for First Half 2005 Slightly Downward – Austrian Economy Withstands Euro Area Slowdown Rather Well
Booming exports chiefly carried the economy in the first half of 2004. In the light of the decelerating global economy, the high oil prices and the strong euro, exports, however, started to slow in the remaining months of 2004. At the same time, economic growth was driven increasingly by domestic demand, in particular by the very lively investment activity. In the fourth quarter of 2004, real exports were down 0.6% quarter on quarter. For 2004 as a whole, exports nevertheless expanded by a solid 9%. Yet businesses’ assessment of order books implies that exports are unlikely to match the year-earlier expansion in the first half of 2005.
The years 2003 and 2004 saw exceptionally robust investment growth owing to brisk demand for replacement investment and to the stimulus provided by a subsidy granted for investment that exceeds the average investment level of the previous three years. Meanwhile, an investment share of GDP that has outperformed the figures posted in the record year 2000 points to a forthcoming slowdown in investment activity. The expiration of the above-mentioned investment growth subsidy at year-end 2004 and current survey data corroborate the assessment that investment activity has already peaked.
Economic development in 2005 will depend essentially on the extent to which households step up their consumption expenditure. The second stage of the tax reform coupled with ongoing employment growth – irrespective of the moderate wage settlements – translate into a tangible increase in nominal household income. The higher inflation, however, is dampening purchasing power. At the same time, subdued consumer confidence suggests sustained consumer restraint. Overall, the OeNB nonetheless expects the positive momentum to carry the day and private consumption growth to accelerate in 2005.
Labor market conditions – one of the reasons for the rather low consumer confidence – are marked by vigorous employment growth amid sustained high unemployment. The greater influx of foreign workers and the pension reforms of the previous few years are at the root of the exceptional rise in the labor supply. As the number of registered job vacancies is increasing further, robust employment growth is expected to continue in 2005 and subsequently to ease the situation on the labor market somewhat.
Slight Deterioration of Confidence Indicators
Current confidence indicators reflect the uncertainty over the future economic development in Austria. The European Commission’s economic sentiment index, on a steady rise last year, posted its highest level to date in October 2004. Since then this confidence indicator retreated four times in a row, plummeting to the lowest level in 12 months in February 2005. This slide is likely to be ascribable to the worsened growth prospects for Italy and Germany, Austria’s two main trading partners, the euro’s appreciation and the continued high unemployment ratio.
The subcomponents of this economic sentiment index are only modestly indicative of the further development of the expenditure-side GDP components in 2005. The weaker order book assessment for exports suggests a deceleration of shipments abroad over the course of this year. With capacity utilization in the fourth quarter of 2004 continuing to be at high levels, the demand for capacity-enhancing investment may safely be assumed to be still high irrespective of the sizeable investment share in GDP. This, however, conflicts with the results of the WIFO Investment Survey and the sliding industrial as well as service sector confidence. On balance, evidence of a slowdown in investment activity prevails. In addition, a sharp uptick in private consumption does not seem to be on the horizon. In early 2005, retail confidence stabilized at the low level of the second half of 2004, whereas consumer confidence has remained unchanged for some time now.
Higher Inflation owing to Oil Price Surge
In 2004, average annual HICP inflation stood at 2.0% and thus markedly above the 2003 level of 1.3%. Inflation progressively rose over the course of 2004, climaxing at 2.5% in December. Subsequently, it edged down to 2.4% in January 2005 and to 2.3% in February. Price trends were basically determined by the increase in crude oil prices. An analysis of the HICP subcomponents shows that inflation was particularly high in energy and housing costs, but it also remained above average in the services sector, unchanged from the previous years. Conversely, the trend of below-average price growth of industrial goods likewise continued. Energy prices will determine the path of inflation in 2005. On the assumption that the oil price will more or less move in synch with the forward rates, the surge of the oil price over the past few months – sporadically to above USD 50 per barrel Brent – is likely to keep inflation high until mid-2005 or so. After that, the base effect of the previous oil price spike will dampen the inflation rate. Core inflation is expected to remain below the 2% mark.
In terms of the Negotiated Standard Wage Rate Index, wages augmented by 2.1% in 2004, basically mirroring the increase in consumer prices. In the second half of 2004, consumers suffered real income losses. This trend continued into 2005 but is likely to cease in the first half of this year.
2004 Current Account on Cash Basis almost Balanced
Austria’s current account was virtually balanced in 2004, with the deficit (based on payment flows) coming to EUR 0.8 billion or 0.3% of GDP. Compared with 2003, the current account improved slightly by EUR 0.2 billion. This improvement is entirely ascribable to the vigorous export activity yielding, as expected, a pronouncedly higher surplus of the goods and services subaccount in 2004. The shortfall of the goods subaccount was reduced from 1.7% of GDP in 2003 to 1.1% in 2004, while the surplus of the services subaccount climbed from 2.4% to 2.5%. The deficits of the income and current transfer subaccounts, by contrast, widened to 0.6% and 1.1% of GDP, respectively.
The export boom of 2004 is also reflected in the foreign trade statistics compiled by Statistics Austria. The merchandise trade balance improved from –0.9% of GDP in 2003 to –0.1% in 2004. Goods exports expanded by 13% against 2003. An analysis of the intrayear trend of annual growth rates does not yet point to a perceptible slowdown in export activity. Seasonally adjusted monthly data, however, show that exports peaked in the second quarter of 2004 and noticeably decelerated in the second half of the same year, especially in the fourth quarter. Real export figures, taken from the national accounts, confirm this pattern. An analysis of the merchandise trade by geographic region reveals that the deficit vis-à-vis the EU-15 mounted to –2.8% of GDP (2003: –2.5%), while the surplus vis-à-vis the new Member States remained more or less unchanged at 0.6% of GDP. Merchandise trade with countries outside the EU was very robust, with the surplus rising by 1 percentage point to 2.0% of GDP. In particular, the dynamic growth of shipments to the U.S.A. (+32% in the first 11 months of 2004) came as a surprise, not least because of the gradual appreciation of the euro against the U.S. dollar since mid-2001 and the concomitant deterioration of price competitiveness. Part of this surge may, however, be explained by a statistical effect. Automobile industry exports, which used to be shipped via Germany, now increasingly go directly to the U.S.A.