The Outlook for 1994 and 1995: Economic Recovery at Lower Inflation
All economic indicators point to an incipient recovery. The business climate improved, first in the United States, then in Western Europe. The Austrian economy also shows signs of buoyancy. For 1994 a growth rate of 2 percent, for 1995 a growth rate of 3 percent is expected. The economic rebound is based on an increase in exports, the positive impact of the tax reform, and the improvement in the investment climate as a result of Austria's expected accession to the EU. The acceleration in economic growth will halt the rise in unemployment. At the same time the inflation rate will slow down markedly. In an international comparison, the recession of 1993 in Austria was short and mild. Gross domestic product declined only marginally (–¼ percent), but the negative impact of the slump on unemployment and the federal budget will remain a serious challenge to economic policy making for years to come. The upswing in economic activity in the U.S. has brightened the economic climate in Europe. Positive economic forces have also gained momentum in Austria. Exports, orders, and manufacturing output exceeded the level of 1992. The greatest risk for a sustained economic recovery concerns the development in Germany. Grave economic problems and a rise in tax burdens in the wake of Germany's reunification have shaken consumers' confidence. But there are also positive stimuli from exports. In the end, much will depend on the German business sector's willingness to invest in the face of a shrinking domestic market. The forecast by the Austrian Institute of Economic Research is based on the expectation that the fledgling recovery will continue and will not suffer a setback (double-dip recession). The forecast for 1994 was, therefore, revised upwards (+2 percent). A further acceleration to 3 percent is expected for 1995, provided Austria joins the EU. This optimistic assessment is based on the current recovery of the world economy as well as economic policy measures: export gains and the tax reform of 1994 are likely to be the mainstays of the economic upswing. Lively construction activity, an improvement in business earnings, and export gains in overseas will reinforce the upturn. Austria's expected accession to the EU (by eliminating the danger of discrimination) will strengthen investors' confidence. A failure to join the EU is likely to disappoint expectations and dampen the investment climate markedly. Economic growth will suffice to stabilize the labor market. The loss of jobs in manufacturing will continue, however. The rate of unemployment will remain unchanged; employment and the supply of labor will expand. The development of prices will be watched very closely over the next year as Austria must make up ground in achieving price stability. In 1994 and 1995 inflation should slow down markedly. The deceleration at the beginning of 1994 suggests that the inflation forecast of 2.8 percent for 1994 can be maintained. A further significant deceleration to 2.2 percent is likely in 1995 if Austria joins the EU. Lower food prices and increased competitive pressure on prices of manufactured goods and insurance services will be the main factors slowing down inflation. Wage inflation, which usually responds to an upswing with a lag of one year is likely to remain modest. Real disposable income will expand, however, as a result of an increase in employment and the drop in the inflation rate. Private consumption will pick up slightly. The performance of the Austrian economy will follow very closely that of other European economies, but will be significantly better than that of Germany, which will labor under tax increases.
|Year of publication:||
WIFO Monatsberichte (monthly reports). - Österreichisches Institut für Wirtschaftsforschung (WIFO), ISSN 0029-9898. - Vol. 67.1994, 4, p. 195-208
Österreichisches Institut für Wirtschaftsforschung (WIFO)
|Subject:||Prognose für 1994 und 1995. Konjunkturaufschwung bei sinkender Inflation | The Outlook for 1994 and 1995: Economic Recovery at Lower Inflation|
|Description of contents:||Abstract|
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