Other State Department Archive Sites

The State Department web site below is a permanent electronic archive of information released online from January 1, 1997 to January 20, 2001. Please see www.state.gov for current material from the Department of State. Or visit http://2001-2009.state.gov for information from that period. Archive sites are not updated, so external links may no longer function. Contact us with any questions about finding information. NOTE: External links to other Internet sites should not be construed as an endorsement of the views contained therein.

Country Commercial Guides FY 2000: Austria Report prepared by U.S. Embassy Vienna, released July 1999 Note*

CHAPTER II. ECONOMIC TRENDS AND OUTLOOK

A. Major Trends and Outlook

The Republic of Austria has an open economy, dependent on foreign trade and closely linked to the economies of other European Union (EU) member states, particularly Germany. Foreign trade and investment ties with Central and Eastern European countries also play an increasingly important role. Following a 2.5% real GDP growth rate in 1997, Austria's economy picked up momentum and, driven by exports, expanded 3.3% in 1998. Forecasts for 1999 call for growth of about 2.2%, those for 2000 for growth of about 2.4%. The lower growth is the result of slower growth in Austria's leading export markets, particularly Germany. Private consumption and the stimulative effects of a tax reform package are expected to offset weakening exports. Without the tax package, GDP growth in 2000 is forecasted at half a percentage point lower. Inflation is expected to hold steady at around 1% in 1999/2000. Due to moderate wage increases and a boost in productivity, unit wage costs in Austrian industry have been declining, so that Austria's international competitiveness improved markedly.

From 1999-2003, the Austrian economy is expected to grow at an average annual real rate of about 2.4%, with the low in 1999 and a peak of 3.0% in 2003. Over the next five years, domestic demand, particularly private consumption, will be the main support for economic growth, while exports of goods are expected to grow at more moderate rates than during the previous five years. Unemployment is expected to remain at about 4.2% until 2001 and only then start to fall to below 4.0%. Even though Austria will continue to enjoy one of the lowest unemployment rates in the EU, unemployment remains a sensitive political problem. Inflation, while edging upward, is still expected to average a manageable 1.6% over the 1999/2003 period.

Austria's accession to the EU on January 1, 1995, has had a positive impact on foreign investment, inflation and growth by providing access to the single market and by fostering liberal policies to promote competition and dismantle protectionism. Austria was among the eleven founding members of the Economic and Monetary Union (EMU) launched on January 1, 1999 and has adopted the common "Euro" currency, which will fully replace the Austrian schilling in 2002.

In the national elections scheduled for October 1999, the Austrians will elect a new government. One of the new government's most challenging tasks will be continuing budget consolidation on which Austria has received international criticism for a less-than-ambitious effort. Other important tasks for the new government will be introducing the single Euro currency, fighting unemployment, privatizing and defining Austria's role in a European security system.

Although Austria's economy has become more liberal and open, foreign investors as well as local businesses still must cope with rigidities, barriers to market entry, and an elaborate regulatory environment in certain sectors. Thus, pressing ahead on deregulation and liberalization, continuing privatization, and restructuring of Austrian industry will continue to be on the agenda for the new government. The outgoing government has made an effort -- to some extent successful -- to facilitate access, to open markets, and to streamline the permit process. The implemented deregulation of the telecommunications and electricity sectors should contribute to improve efficiency and resource allocation. However, Austrian industry must continue the shift from less competitive low-tech production towards more specialized value-added manufacturing to attract more potential foreign partners and to meet increased competition.

The economic opening of the Central and Eastern European (CEE) countries has had a stimulative effect on Austria's economy. Austrian firms have invested sizable sums and continue to move labor intensive low-tech production to these countries. Austria has the potential to attract EU firms seeking convenient access to the emerging markets of the CEE. The Austrian government, as well as business interests, support the EU's eastern enlargement plans, but under the condition that the enlargement candidates meet EU standards prior to EU accession and that transition periods for free movement of labor and of services are implemented to prevent competitive distortions in the Austrian labor market.

The Austrian schilling depreciated slightly against the dollar in 1998, but was stable against most European currencies. In the first half of 1999, the schilling continued to lose against the dollar. With Austria being one of eleven founding members of the Economic and Monetary Union (EMU), the schilling now enjoys a fixed exchange rate against the currencies of the other ten EMU members, which include Austria's most important foreign trade partners.

In 1997 and 1998, U.S. exports to Austria rose strongly, although the accession of Austria to the EU has brought stiffer competition from European producers in some export markets. Even though some U.S. exporters, particularly those in the data processing hardware and semiconductor sectors, are confronted with higher customs tariffs and burdensome regulations, U.S. exports to Austria have nonetheless continued to increase. In 1997, U.S. exports were up 33%, with a further 4.0% rise in 1998.

B. Government Role in the Economy

Recent years have seen a declining government role in the Austrian economy. In 1997, the government completed an ambitious ten-year privatization program, which included the former state-owned industries group, a conglomerate of steel, aluminum, petroleum, engineering, banks and other government entities. The government has either sold its shares completely or retained only a minority interest in some of these companies. The sale of the Austrian Tobacco Works (Austria Tabakwerke) is underway and that of the Postal Savings Bank planned. The federal railroads have been excluded from the federal budget, and the newly reorganized Post und Telekom Austria (PTA) is managed as a private corporation and required by law to list its shares on the stock exchange. However, plans to refocus the activities of the government's privatization agency OIAG to that of a government holding of shares in core enterprises have raised new concern over undue political influence on industry.

With the implementation of the 1996/97 austerity program, the government was able to reduce the total public sector deficit from 5.1% of GDP in 1995 to 2.2% in 1998 and thus managed to meet the "convergence criteria" for EMU participation. However, the tax increases included in the austerity program pushed the share of total taxes (including mandatory social insurance contributions) in GDP to more than 44% in 1998. The very generous "family tax" reform of 1998 and the income/payroll tax reform for the year 2000 eased taxes on families and employees, but the resulting decline in government revenues could put pressure on the 3.0% EMU convergence limit. The government is convinced, however, that it will still be able to meet its goal of a total public deficit of no more than 1.4% of GDP in 2002, without having to resort to additional austerity measures. Budget consolidation remains a major challenge for the new Austrian government in year 2000 and beyond. Whether the new government has the political will to implement this policy remains to be seen.

C. Balance of Payments Situation

The Austrian current account, which was balanced in the late 1980s and until 1993, has deteriorated since then to a steady and sizeable deficit of about 2% of GDP, but with some slight improvement in 1998 (from AS 61.4 billion in 1997 to AS 54.5 billion in 1998). However, economists agree that with Austria's participation in the EMU, the current account no longer has the importance it had for Austria as a small economy with an autonomous "hard currency" monetary policy approach. Economists expect the trade deficit to rise slightly in 1999/2000 due to weakening export growth. At the same time, the surplus from tourism is expected to rise again after falling sharply in past years, so that the current account deficit should decline further to about AS 47 billion in both 1999 and 2000.

Foreign direct investment in Austria continues to grow at a fast pace. After growth of AS 29 billion (US$ 2.3 billion) in 1997, foreign direct investment in Austria grew by another AS 73 billion (US$ 5.9 billion) in 1998. The capital account showed an increase of AS 37 (US$ 3.0 billion) in Austrian direct investment abroad in 1998.

D. Infrastructure Situation

Austria has a modern communications and transportation infrastructure. An extensive highway system provides convenient access to major European industrial centers and ports. The Austrian railroad offers efficient passenger and freight service and modernization plans will introduce higher-speed rail service in the near future. Several airline carriers offer direct flights from the Vienna International Airport to major U.S. destinations. The Austrian telecommunications network is sophisticated and reliable, though expensive by U.S. standards. However, according to latest studies, liberalization, and increased competition have led to a sharp decline in telecom prices, which have not yet bottomed out.

The Austrian government has maintained a low profile on Y2K preparedness. For the most part, authorities view Y2K as a technical problem, assigning technical personnel to take the lead. With little publicity and the absence of any leadership on the issue, public awareness of the potentially disruptive effects of Y2K is low. According to a poll taken at the end of 1998 more than half of Austria's 250,000 small and medium sized companies had done nothing to prepare for Y2K. However, business associations, such as the powerful Austrian Economic Chamber are actively working to draw attention to the problem, through websites, lectures, workshops etc. Government agencies and larger companies (including banks, airlines and utilities) have been making active preparations over the past six months. While catastrophic collapse of emergency services or basic infrastructure are not expected, there are likely to be some Y2K-related inconveniences.