The Austrian economy is being hit by the full effect of the international financial crisis in 2009, falling into a recession. The European Commission is forecasting a 1.2% decrease in economic output. Although this decrease in gross domestic product still leaves Austria a rate that is 0.9% better than the expected development in the EU-15 countries. Nevertheless Austria’s growth advantage is melting away compared to the recent past.
The economic research institute “Wirtschaftsforschungsinstitut (WIFO)” expects the collapse of the capital goods and automobile industries in Austria’s trading partner Germany to have a particularly negative effect on Austrian economic output. Exports to the Central and Eastern European region will also slow considerably. In addition, the tourism sector, which has been a major driver of economic growth in the past, will also react negatively to weak international growth. Moreover, WIFO also predicts that rising uncertainty will make it more difficult for private households to raise further debt for new housing construction and consumption, and that the financial crisis will limit the ability of companies to obtain risk capital.
The Austrian federal government has approved a package of measures to cushion the effects of the economic crisis. A EUR 2.2 billion tax reform aimed at strengthening personal consumption, along with two economic stimulus packages, are expected to result in a total economic stimulus of around EUR 6 billion.
The inflation rate, on the other hand, will amount only 1.2%. This two percentage point reduction is due to large decreases in commodity prices.
The European Commission expects that the strongly export-driven economies of the Central and Eastern European (CEE) region will not be able to fully avoid the effects of the global economic crisis.
As a result, it is expected that the record economic growth recorded in previous years will be followed by a short-term economic cooling off. The expectation is for an average growth of 1.1%. It should also be noted that forecasts for the CEE region are widely varying. In Hungary, for example, economic output is forecast to decline by 1.6%, while in the Czech Republic, Slovakia and Poland, robust growth in the range of 1.7% to 2.7% is expected to continue in 2009.
The slow-down in economic momentum is seen to be the result of the economic peaks having been passed. Also to be cited here is the dramatic 2.1% reduction in economic output predicted for the EU-15 countries (the region’s most important trading partners and investors), a direct consequence of the economic crisis originating in the U.S.
Apart from the expected reductions in exports, growth in personal consumption, which inter alia had also led to high demand for personal credit up until now, will also flatten off considerably. Due to higher refinancing costs and the lower availability of capital from banks (a consequence of financial institutions’ loss of confidence in one another), there will be a drastic increase in the cost of personal credit and hence a drop-off in demand. This weakening of demand for credit is nevertheless expected to have a positive effect on sustained medium to long-term economic growth in many countries of the CEE region, where credit growth led to a large expansion in current account deficits.
The large decrease in inflation rates, from an average of 6.3% to 3.5%, will lead to increases in real wages, thereby also helping to stabilise demand from private consumption.
Therefore, in spite of the declining trend in economic growth, it can generally be expected that the momentum of this region’s economic catch-up process will remain largely intact.