Austria Country Forecast

Thunder on the Right

The far-right FPÖ has enjoyed a surge in popularity amid growing concerns that instability in the Middle East and North Africa will produce a flood of Arab immigration and growing doubts about the benefits of European integration as a deepening debt crisis in the euro zone threatens to drag down the regional economy. Recent polls indicate that the FPÖ could finish ahead of both the SPÖ and the ÖVP in the event of an early election, and given the increased support for the nationalist BZÖ, the traditional parties would have a difficult time keeping the FPÖ out of power…
That prospect will create an incentive for both of the governing parties to avoid a conflict that might jeopardize the survival of the coalition, at least in the near term. However, the recent trend in party support is unlikely to be reversed anytime soon, as Chancellor Werner Faymann’s government faces heavy pressure to impose harsh austerity measures, and the ÖVP’s insistence on cutting the deficit without raising taxes will heightened tensions within the coalition…
With growth forecast to slow sharply in 2012, there is a good chance that additional austerity measures will be required in 2013. Even if the coalition parties manage to bridge their differences and pass a budget for 2012, the partnership is unlikely to survive the battle over the budget for 2013, an election year. Even if the FPÖ finishes second to the SPÖ, the ÖVP may very well prefer to back a government headed by FPÖ leader Heinz-Christian Strache, rather that signing on for another term with the SPÖ…
Fiscal Constraints Will Impede Medium-term Recovery
The immediate focus of a center-right government formed in the 18-month forecast period will be doing what is necessary to trim the budget deficit to no more than 3% of GDP and create a basis for longer-term fiscal stability. The EU has initiated excessive deficit procedures against Austria, and the establishment of a more effective mechanism to ensure adherence to macroeconomic criteria is among the reforms being instituted in response to the debt crisis in the euro zone…
A center-right government will make further efforts to reduce cumbersome administrative procedures and rigid market regulations, but the FPÖ’s euroskeptic tendencies will be an obstacle to implementing policies designed to encourage foreign investment…
The biggest threat to long-term fiscal stability is the rising cost of state pensions and health services, which is unlikely to be tackled in a comprehensive manner during the forecast period. The ÖVP will push hard for structural reforms aimed at creating fiscal conditions conducive to tax cuts, but the FPÖ will draw the line at selling off state enterprises, a stance that will contribute to chronic friction between the coalition partners…
The sovereign credit uncertainty in Europe and fiscal tightening in many countries will weaken external demand, slowing the pace of export growth over the second half of 2011. Inventory accumulation will contribute to a fall-off in fixed investment, while rising inflation (which is forecast to average 3.2% this year), declining social benefit payments, and mounting fiscal uncertainty will weigh increasingly on consumers. The reversal of employment gains will further weigh on household consumption…
In combination, these factors are expected to hold annual real GDP growth to 2.6% in 2011. The impact of weaker external demand will be especially pronounced next year, when the pace of growth is forecast to decelerate to just 1%…
Political impediments to action on structural reforms, including privatization, will dampen the prospects for growth, which will average 1.7% annually through 2016. Greater fiscal restraint will have a moderate dampening effect on inflation, which will average 1.8% annually over the forecast period. The current account balance will remain in surplus at an average of $4.6 billion per year through 2016.

Economic Forecasts for the Three Alternative Regimes

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