Cautious Recovery of Domestic Demand. Economic Outlook for 2006 and 2007

The Austrian economy is expected to grow by 2.4 percent in real terms this year, broadly in line with its long-term trend. In 2007, growth may moderate to an annual rate of 2 percent. In the current year, activity is driven by lively foreign demand, with goods exports gaining 6½ percent in volume and manufacturing output 5 percent. The export-oriented manufacturing industry is booming for the third consecutive year. Underlying the current WIFO projections is the assumption that firms will no longer hold back with investment as they have done until the end of 2005. Corporate spending on machinery and equipment may increase by 4 percent in volume. Weakness of domestic demand has been weighing on activity during the last five years; meanwhile, conditions for a moderate recovery have improved. The construction sector is benefiting from reinforced investment in road construction and from rising housing demand. Higher wage settlements and a lower rate of inflation provide scope for an increase in private consumption, projected at 1.9 percent in volume for the current year. In spite of high oil prices, overall price stability has been maintained. Headline inflation is set to moderate to 1.7 percent, with prices of manufactures broadly flat and generally modest hikes for service prices. The number of unemployed is set to decline slightly in 2006, largely due to a sizeable increase in the number of jobless people enrolled in labour market training which are not recorded as unemployed. The rate of unemployment is expected at 7.1 percent of the dependent labour force on annual average 2006, before edging up to 7.2 percent next year. The general government deficit is projected to widen in 2006 to an amount of € 5 billion, equivalent to 1.9 percent of GDP.