State of the Nation: High Times

The Austrian economy is going strong, according to a recent study conducted by the Institut für Hoehere Studien (Institut for Advanced Studies, or IHS), and recent trends are now catapulting Austria up among the top European players.

Confirming a study done earlier this year by Oesterreichichen Wirtschaftsforschungs Insitut (Austrian Institute for Economic Research, or WIFO), the IHS has attested that the economy has seen even stronger growth than in the vigorous year of 2006. All of this is expected to continue robustly until the end of the decade, slightly tapering off by 2011.

And the economy seems resilient. Even in light of the recent "subprime" crisis in the U.S. real estate market, Austria has faired well, and particularly well compared to other European Union countries.  According to the report, the Austrian economy will be affected very little.

"The economy is so stable that it can carry quite a lot," WIFO chief Karl Aiginger told the Austrian daily Der Standard in a recent interview.  "The effects of growth are stronger than expected."

Though a snowball effect from the falling stock markets can’t be ruled out —and the Börse did feel the tremors of the quake in recent weeks – the impact had been, and is expected to remain – minimal. This is due to two factors; the equity financing and capital investment of businesses from current record-high earnings and high domestic demand and consumption.

Overall growth based on Gross Domestic Product is also strong, according to the IHS report. During the first quarter of this year, growth accelerated at a rate of 0.9% – 0.2% higher than the rate during the final quarter of 2006.  Overall growth was forecasted to continue at a rate of 0.9% quarter on quarter, and experts expect an overall growth of 3.1% for 2007.

This puts Austria well above the projected Eurozone growth rate of 2.5%. The IHS predicts this trend will continue throughout the decade, though slightly less enthusiastically in years to come. For 2008, the organization predicts a growth of 2.8%, and a continued rate of around 2.2% until 2011.

Recent high corporate earnings make the risk of borrowing and investing trivial for Austrian companies and investment is not expected to "flatten," according to the WIFO’s Aiginger, even if the worldwide economy should experience a downturn.  The second part of the equation, private consumption, supported by a high savings rate, will further support the Austrian economy against a slump.

Increased private consumption and savings has been prompted by falling unemployment, and these trends will act as a buffer to a world wide downward pressure.  The high savings rate in Europe and particularly in Austria is proving to be a strong indicator during the last months.  American consumers, in contradiction, are highly vulnerable to the recent high-risk mortgage scandal largely due to their historically low savings.

According to the report, consumption in Austria is expected  grow around 2.25% for the next years and the savings rate will continue to grow at  0.25%.  Rates are then predicted to level out by the end of the decade, returning to levels similar to that of 2005, thus the report.

Investment by Austrian corporations is particularly strong in the manufacturing and construction sectors.

Foreign direct investment in Eastern Europe has been increasingly strong, in part due to Austria’s proximity to new EU member countries. Traditional and historical ties with the East give Austria an advantage over other European players. More than 6% of foreign direct investment in Central and Eastern Europe is from Austria. Telekom Austria, for example, the main domestic telecom provider, is also one of the top telecommunications companies in new EU countries.

In the financial sector, Austria’s, stock exchange, the Wiener Börse, recently purchased the Budapest Stock Exchange and has shown interest in the stock exchanges of several other eastern European nations, including Bulgaria and Slovenia. Austria’s largest bank, Erste Bank, earns over 60% of its profits in the East. These are the benefits of globalisation and EU expansion, the WIFO and IHS experts have claimed.

But EU expansion and globalization in general, bring other issues to the forefront in Austrian politics.  A recent interest in Russian and Chinese Staatsfonds (consolidated state funds) to invest in Austrian interests has brought cries for protection from some politicians. WIFO’s Michael Böheim believes such protectionist measures are counterproductive, claiming them to be "counteractive measures of the past."  Austrian politicians favoring "Firewalls" to block capital movements act under the pretense that such foreign investment can threaten national security, the domestic economy and cause "know-how-drain."

Böheim, however, believes this is just a façade for old fashioned protectionism. Traditional free-market economists favor free movement of capital, and believe that the EU, and particularly Austria, can benefit from globalisation.

"If China and Russia want to reinvest their own profits from globalization, it is difficult for one to keep the position of free capital movement being a one way street," Böheim said. The recent situation is more complicated, as a Staatsfond, by definition, is an investment by the state, not by an individual or a corporation.  There was substantially less media attention given to the investment of Russian oligarch Oleg Deripaska, who purchased 30% of STRABAG, Austria’s largest construction company earlier this year. This acquisition is said to have given Russia the advantage in the bid for the 2114 Winter Olympics, as Deripaska intends to use his new influence in the company to build the infrastructure in Stochi that out-positioned Salzburg in the final bidding. While the contract in Russia will benefit STRABAG and its Austrian investors, the Russian win of the Olympics can also be seen as a loss to Austria of the added investment that comes with a world-class event.

There is a large grey area between individual investment and that done by a state fund.  Politically, Austria feels more threatened by the thought of a state, particularly one with the economic might of a Russian or China buying large positions in Austrian corporations.

Another issue, however, is the distribution of benefits.  According to Fritz Breuss, also of WIFO, Austria’s geopolitical location could hurt the domestic economy more than it could help.  With EU expansion and the increasingly free movement of labor, he believes corporations and investors will profit substantially more than the average worker in Austria. Globalization and EU expansion put pressure on wages, and corporate profits have clearly risen more than real income. The effect, felt throughout Western Europe, is amplified in Austria due to its proximity to low-wage nations to the East and its traditional interdependence on these nations.

With the threat of companies moving abroad to take advantage of a low-wage labor market, the Austrian work force is "practically blackmailed," Breuss says, to keep wages low. He believes that this transitional period will do considerable damage to domestic wage rates.  This pressure on wages may end up tempering consumption and demand, according to the IHS report, but at the same time is curbing inflation in a time of strong growth.

As for the general condition of the labour market, the report is optimistic. Unemployment is expected to drop from the current 6.8% to 6.0% by the end of the decade, according to the Austrian Arbeitsmarktservice (the Employment Service). This will earmark 220,000 new jobs in the domestic market.

While a percentage of those jobs will inevitably end in the hands of workers coming from the expanded EU region, fear of job losses for Austrian citizens seems unwarranted.  In the last three years, only 10,000 new jobs have gone to Eastern European citizens, bringing that to a total of 50,000 since the beginning of EU expansion.

And though inexpensive skilled labor from the East may hold an advantage over Austrian citizens in some sectors, the forecast shows that 190,000 of the 220,000 new positions will be awarded to native Austrians – still a substantial number of jobs.