As Recession Grips its Neighbors, Austria May Escape the Carnage

Government officials finally moved in concert to deal with pressing liquidity issues, but the only solution that will work is real economic growth in all sectors of the Eurozone. Unfortunately, recent manufacturing data points to a current downturn, as many of the weaker member states gradually slip back into recession. Austria is an exception to the rule. Projected domestic growth for 2012 is a meager 0.3%, but still positive.

Austrians continue to benefit from a high standard of living, and the nation can continue to boast about being one of the 12 richest countries in the world in terms of GDP per capita, thanks in part to the actions of its central bank, the Oesterreichische Nationalbank (“OeNB”). Central bank officials recently stated, “The growth outlook has recently improved noticeably. The economy is likely to stabilize at a low level in the first half of 2012 after hitting the bottom of the current growth cycle in the fourth quarter of 2011.”

Hopefully, the worst is over in the Austria market, but the central bank can only go so far when fulfilling its direct responsibilities. A majority of tasks associated with a central bank were transferred to the newly formed ECB, but many cooperative tasks remain that include:

• Ensuring national financial market and pricing stability;
• Issuing notes in accordance with ECB policy directions;
• Ensure liquidity in the business sector through loan programs with banks;
• Maintaining and managing the deployment of foreign exchange reserves;
• Employing monetary policy instruments in accordance with the ECB advice;
• Producing statistics and analyses.

Germany has traditionally been the major trading partner for Austria, but after the formation of the Euro, Austria has moved to broaden its trade relations with other member states of the EEU. As a result of these changes, however, the country is now more dependent somewhat on the progress made by Italy, its second largest trading partner, and others. Austerity programs are not generating new growth at present, and diminished demand in the near term will most likely be the result.

Despite these clouds on the horizon, Ewald Nowotny, the governor of Austria's Central Bank, remained upbeat. He recently remarked, “The structure of the Austrian economy is well-balanced; output has been evolving dynamically at above-average rates; Austria has a sizeable current account surplus; and it is the EU country with the lowest unemployment rate (4%).” Rating agencies, however, have their own interpretation of future prospects.

Although recent downgrade headlines chose to focus on France, Austria also lost their coveted “AAA” rating. Austria’s inclusion with France, Italy, Spain, and Portugal came as a surprise to many economists, considering the many positive aspects of the nation’s economy. Nevertheless, foreign exchange reserves stand at $27 billion, barely ahead of Portugal at $24 billion, and the nation’s budget deficit has grown to 4.6% of GDP, of concern but at least favorable by current European standards. Political debates have leaned to the conservative side, with budget cuts gaining support while tax increases are shouted down. Likely budget targets will be health spending, pension obligations, and the state railway system. Rising energy costs could also upset current growth projections.

While “Security, stability and trust” may be the guiding principles the Oesterreichische Nationalbank, their primary concern is that private consumption may stall in the coming months. A strong labor market, coupled with low inflation, however, should lead to stability in real incomes.

About the Author:

Tom Cleveland has accumulated over 30 years of experience in the international payments industry. Before working for Visa, Tom earned an engineering degree from Georgia Institute of Technology and did graduate work in Finance at Georgia State University. Currently, Tom researches investments while writing for ForexTraders.com.