Growth Slowing Down Further. Economic Outlook for 2005 and 2006

Since late autumn 2004, stimulus from exports is weakening and manufacturing output is losing momentum. Consumer demand from private households has not revived so far. In the second half of 2005, business activity may recover, on the back of an expected stabilisation of exports and industrial production accompanied by somewhat higher consumer spending and construction investment. For the whole year 2005, WIFO projects real GDP to grow by 1.8 percent, markedly below last year's rate of 2.2 percent. Prospects for 2006 are particularly uncertain at the present juncture; the WIFO projections are for growth at a broadly similar pace as in the current year (+1.9 percent). Despite healthy growth of employment, unemployment is set to rise further to a rate of 7.3 percent of the dependent labour force, on account of a strong increase in labour supply. Due to high energy prices, rising housing costs and the increase in the tobacco tax, headline inflation will reach 2.5 percent this year before moderating to 1.9 percent in 2006. Subdued business activity and rising unemployment continue to weigh on public finances, such that the general government deficit may remain broadly unchanged at 1.9 percent of GDP next year.