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Monetary Policy & the Economy

Quarterly Review of Economic Policy

O e s t e r r e i c h i s c h e N at i o n a l b a n k

E u r o s y s t e m

Q2/04

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The OeNBs quarterly publication Monetary Policy & the Economy (Geldpolitik & Wirtschaft)

provides analyses of cyclical developments, macroeconomic forecasts, studies on central bankingand economic policy topics as well as research findings from macroeconomic workshops andconferences organized by the OeNB.

Editorial board:Josef Christl, Peter Mooslechner, Ernest Gnan, Eduard Hochreiter, Doris Ritzberger-Grunwald,Gunther Thonabauer, Michael Wurz

Editors in chief:Peter Mooslechner, Ernest Gnan

Coordinator:

Manfred Fluch

Editing:Karin Fischer

Translations:Dagmar Dichtl, Alexandra Edwards, Ingrid Haussteiner, Irene Muhldorf, Ingeborg Schuch,Susanne Steinacher

Technical production:Peter Buchegger (design)OeNB Printing Office (layout, typesetting, printing and production)

Inquiries:

Oesterreichische Nationalbank, Secretariat of the Governing Board and Public Relations1090 Vienna, Otto-Wagner-Platz 3Postal address: PO Box 61, 1011 Vienna, AustriaPhone: (+43-1) 40420-6666Fax: (+43-1) 40420-6696E-mail: [email protected]: http://www.oenb.at

Orders/address management:Oesterreichische Nationalbank, Documentation Management and Communications Services1090 Vienna, Otto-Wagner-Platz 3Phone: (+43-1) 40420-2345Fax: (+43-1) 40420-2398

E-mail: [email protected]: http://www.oenb.at

Imprint:Publisher and editor:

Oesterreichische Nationalbank1090 Vienna, Otto-Wagner-Platz 3Gunther Thonabauer, Secretariat of the Governing Board and Public RelationsPhone: (+43-1) 40420-0Internet: http://www.oenb.atPrinted by: Oesterreichische Nationalbank, 1090 Vienna' Oesterreichische Nationalbank 2004

All rights reserved.

May be reproduced for noncommercial and educational purposes with appropriate credit.

DVR 0031577

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Analyses

Global Recovery and Stable Domestic Economic Conditions SupportModerate Upswing Economic Outlook for Austria from 2004 to 2006 (Spring 2004) 6Gerhard Fenz, Johann Scharler, Martin Schneider

The Impact of Oil Price Changes on Growth and Inflation 27Martin Schneider

Sectoral Specialization in Austria and in the EU-15 37Jurgen Janger, Karin Wagner

The Role of Revaluation and Adjustment Factors in Pay-As-You-Go Pension Systems 55Markus Knell

Financial Market Structure and Economic Growth: A Cross-Country Perspective 72Friedrich Fritzer

The Role of Bank Lending in Market-Based and Bank-Based Financial Systems 88Sylvia Kaufmann, Maria Teresa Valderrama

Highlights

Growth and Stability in the EU: Perspectives from the Lisbon Agenda Results fromthe 32nd Economics Conference 100Sylvia Kaufmann, Burkhart Raunig, Helene Schuberth

Notes

Abbreviations 110Legend 112List of Studies Published in Monetary Policy & the Economy 113

Periodical Publications of the Oesterreichische Nationalbank 114Addresses of the Oesterreichische Nationalbank 117

Monetary Policy & the Economy Q2/04 3

Contents

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Analyses

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In view of lackluster employmentgrowth, moderate wage settlementsand rising inflation, real householddisposable income is set to rise at avery subdued rate in 2004, despite

the effects of the first stage of thetax reform. Therefore, consumerspending is not expected to accelerate

in 2004. The second stage of the taxreform, however, will bring about asubstantial relief for households in2005, which will boost both con-sumption growth and the saving ratio.

Labor market conditions are notexpected to brighten before 2005. In2004, total employment will grow at

Table 1

OeNB S pring Fall Outlook for 2004 Key Results2003 2004 2005 2006

Annual change in % (real)

Economic activityGross domestic product 0.9 1.5 2.4 2.5Private consumption 1.4 1.4 2.1 2.1Government consumption 0.7 0.5 0.3 0.3Gross fixed capital formation 4.4 3.3 4.2 4.7Exports of goods and ser vices 0.8 4.0 6.4 7.5Imports of goods and services 2.5 4.5 6.5 7.4

% of nominal GDP

Current account balance 0.9 1.2 1.1 0.9

Percentage points

Contribution to real GDP growthPrivate consumption 0.8 0.8 1.2 1.2Government consumption 0.1 0.1 0.1 0.0Gross fixed capital formation 1.0 0.8 1.0 1.1Domestic demand (excl. changes in inventories) 1.9 1.6 2.2 2.3Net exports 0.8 0.2 0.1 0.2Changes in inventories (incl. statistical discrepancy) 0.2 0.1 0.2 0.0

Annual change in %

PricesHarmonised Index of Consumer Prices (HICP) 1.3 1.7 1.5 1.6Private consumption expenditure (PCE) deflator 1.5 1.6 1.6 1.7Deflator des Bruttoinlandsprodukts 1.5 1.5 1.4 1.6GDP deflator 1.7 0.8 0.7 1.0Compensation per employee (at current prices) 2.4 2.1 2.5 2.7Productivity (whole economy) 0.7 1.2 1.8 1.6Compensation per employee (at 1995 prices) 0.8 0.4 0.9 1.1

Import prices 0.8 0.3 0.7 0.6Export prices 0.1 0.1 0.6 0.8Terms of Trade 0.7 0.2 0.1 0.2

Income and savings1

Real disposable household income 1.0 1.0 2.4 2.2

% of nominal disposable household income

Saving ratio 7.9 7.7 8.1 8.3

Annual change in %

Labor marketPayroll employment 0.3 0.3 0.7 1.0

%

Unemployment rate (Eurostat definition) 4.4 4.5 4.4 4.1

% of nominal GDP

BudgetBudget balance (Maastricht definition) 1.3 1.4 1.9 1.7Government debt 65.4 64.8 64.0 63.0

Source: 2003: Eurostat, Statistics Austria, 2004 to 2006: OeNB spring 2004 outlook.1 2003: OeNB estimate.


Economic Outlook for Austria

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a rate of 0.2%, as it did in 2003. Pay-

roll employment will expand by aslightly higher 0.3%. Labor supplywill expand relatively robustly overthe entire forecast horizon. Severalstructural factors such as the increasein marginal employment, the risingnumber of foreign workers and thegreater labor force participation ofmature workers will contribute to thisgrowth. The unemployment rate (Eu-rostat definition) will therefore keep

increasing slightly to 4.5% in 2004.In 2005, employment growth will stillnot have enough momentum to no-ticeably reduce the unemploymentrate. Unemployment is not expectedto decline until 2006.

After recording a surplus of 0.2%of GDP in 2002, the current accountswitched into deficit in 2003 but can,with a shortfall of 0.9%, still be con-sidered close to balance. This small

deficit was mainly induced by the bal-ance of trade, which will continue todetermine current account develop-ments over the forecast horizon. Theincome and transfer accounts are ex-pected to remain unchanged. The cur-rent account balance in 2004, 2005and 2006 is expected to be 1.2%,

1.1% and 0.9%, respectively.After recording an increase of

1.3% in the HICP in 2003, the OeNB

expects inflation to rise to 1.7% in2004. Inflation is set to quicken inthe wake of the surge in oil pricessince spring 2003, which has only par-tially been offset by exchange rate de-velopments. The rise in energy taxeseffective from January 1, 2004, willcontribute 0.16 percentage point tototal inflation in 2004. Prices are notexpected to be subject to wage or de-mand pressures in 2004 and 2005. In-

flation is projected to edge down to1.5% in 2005, in line with assumedsinking oil prices. The output gap is

presumed to close at the beginning

of 2006 and to subsequently turnslightly positive. The ensuing costand price pressures will push inflationinsignificantly higher (1.6%) in 2006.

The budget balance (Maastrichtdefinition) for 2004 is projected tobe 1.4% of GDP, after coming to

1.3% in 2003. Due to the effectsof the tax reform, the budget balanceis forecast to deteriorate to 1.9%and 1.7% of GDP in 2005 and

2006, respectively, despite improvedeconomic conditions.

2 Technical Assumptions

The OeNB compiled this forecast asits input for the Eurosystems spring2004 staff projections for macroeco-nomic trends in the euro area.

The forecast horizon ranges fromthe first quarter of 2004 to the fourthquarter of 2006. May 17, 2004, was

the cutoff date for the underlying as-sumptions on global economic trendsand for the technical assumptions oninterest rates, exchange rates andcrude oil prices.

The OeNB used its macroeco-nomic quarterly model to preparethe projections for Austria.

This forecast is based on the as-sumption that the monetary policyframework will remain unchanged. It

therefore presupposes constant levelsof both short-term nominal interestrates and the nominal effective ex-change rate of the euro (euro area in-dex) over the entire forecast horizon.The underlying short-term interestrate (three-month EURIBOR) is basedon the two-week average prior to May5, 2004. Long-term interest rates,which are in tune with market expect-ations for ten-year government bonds,

are set at 4.27% (2004), 4.39%(2005) and 4.47% (2006). A constantrate of USD/EUR 1.189 is assumed

8 Monetary Policy & the Economy Q2/04


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for future USD/EUR exchange rate

trends. Taking exchange rate valuesto date into account, we arrive at anaverage rate for 2004 of USD/EUR1.205. In the current year, the eurois thus expected to appreciate by6.5% year on year relative to theU.S. dollar. The euro is forecast to ap-preciate less against other currencieson average. The nominal effective ex-change rate used for the euro areaprojection is 1.7% higher in 2004 than

it was in 2003. For the period of 2004to 2006, we assume oil prices ofUSD 34.6, USD 31.8 and USD 29.2per barrel of Brent in each successiveyear. The projected future trend incrude oil prices is based on futuresprices. Oil prices in 2004 are USD8.5 higher (+32%) than in the fall2003 outlook.

3 Favorable International

Environment3.1 Global recovery gathering

strength

The recovery of the global economy isgaining pace. Expectations on the ex-tent of the global recovery have beenrevised upwards since the OeNBs fall2003 outlook. In the second half of2003, the world economy outsidethe euro area experienced 5.0%year-on-year growth, while the fall

outlook had projected a growth rateof 4.1%. Expectations of fall 2003for the first quarter of 2004 have beenexceeded as well. The driving forcesbehind the expansion are the U.S.A.and Asia, currently the most dynamicregions in the global economy. Whilethe U.S. upswing is fueled by domes-tic demand, Asian economies owetheir economic boom not only to do-mestic demand, but also to net ex-

ports.The U.S.A. is experiencing robust

economic growth. Real GDP growth

is expected to reach 4.6% in 2004.

In the subsequent years, growth isprojected to lessen somewhat (2005:3.6%, 2006: 3.0%), as the expansion-ary monetary policy is expected tophase out and the high budget deficitrenders a continued loose fiscal policyunlikely. Currently, growth in theU.S.A. is chiefly driven by consumerand capital spending. The dynamic de-velopment of consumption is mainlyattributable to the surge in disposable

incomes, which was triggered by taxreductions. Employment should con-tinue to expand, which will lead to arobust growth of real disposable in-come. This will enable private house-holds to maintain their consumptionlevels and, at the same time, boosttheir saving ratio. Investment in plantand equipment has gathered great mo-mentum. Vigorous demand and his-torically low financing costs coupled

with fiscal incentives are expected toadd further to investment growth thisyear. In 2005 and 2006, investmentgrowth will be dampened by decliningaggregate demand and higher interestrates. Net exports will not contributesignificantly to growth. The U.S. cur-rent account deficit will remain at ap-proximately 5% of GDP until the endof the forecast horizon.

In Japan, economic recovery is

expected to continue. The effects ofimplemented structural reforms andsubsiding deflationary trends willstrengthen domestic demand. In 2004,real growth is projected to accelerateto 3.4% on the back of animatedgrowth in the forth quarter of 2003and in the first quarter of 2004.Currently all demand componentsare making a positive contribution togrowth. Private consumption will be

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ness. In 2005 and 2006, however,

growth might slow down marginally.Nevertheless, 2005 and 2006 are stillpresumed to be years of cyclical ex-pansion for the Japanese economy.Asia excluding Japan will remain thefastest-growing economic area in2004, which is mainly attributable tothe boom in China.

In the United Kingdom current datashow further consolidation of the eco-nomic upswing. In the first quarter of

2004, real GDP progressed by 0.6%(seasonally adjusted and quarter onquarter). The real estate market hasremained stable. Solid growth of pri-vate consumption is expected to con-tinue. The projected rise in inflationcould have a downward effect on con-sumption expenditure towards theend of the forecast horizon. Accord-ing to survey data, investment activitywill experience a substantial boost in

2004. The expected surge in exportdemand will more than offset thedampening effect of the appreciationof the pound sterling on exports.Overall, economic growth from2004 to 2006 will average approxi-mately 3%.

In Switzerland, economic outputdropped to 0.5% in 2003. Recent na-tional accounts data show a return topositive growth rates in the second

half of 2003. Survey data indicate fur-ther acceleration at the beginning of2004. Given its close ties with theeuro area, the Swiss economy willsubsequently mirror euro area devel-opments. The recovery will be drivenby low inflation rates, expected im-provements on the labor market andrising demand on Swiss export mar-kets.

The average growth rate of the

new EU Member States (excludingCyprus and Malta) in 2003 amountedto 3.5% and was thus substantially

above the average growth rate in the

euro area (0.5%). Growth even accel-erated by 1.0 percentage point year onyear. The economic outlook is consis-tently positive. The cyclical patternsof the new Member States, whichare small open economies, arestrongly determined by euro area de-velopments. As the new MemberStates are currently in the process ofcatching up, their economic growthwill substantially exceed average

growth in the euro area over the en-tire forecast horizon. A considerabledegree of uncertainty stems from theeffects of consolidation measures ondomestic demand and future trendson the foreign exchange markets.

Poland experienced a strong ac-celeration of growth in 2003. Withthe depreciation of the Polish zloty,domestic demand recovered and ex-ports picked up immensely. Domes-

tic demand is expected to advancefurther over the forecast horizon,whereas the impact of net exportson growth will gradually diminish. In-vestment activity will be stimulatedadditionally through tax measures.Average growth of real GDP from2004 to 2006 will amount to almost5%.

The growth rates of the CzechRepublic and Hungary over the fore-

cast horizon will be slightly lower at3% and 4%. In Hungaryfiscal policiesintroduced to stimulate the economyin 2003 were ineffective because im-ports rose. The expected economicupswing driven by increased exportdemand and restored business confi-dence will be fairly moderate. Highinterest rates and necessary consolida-tion measures in the government sec-tor will dampen domestic demand.

In the Czech Republic, private con-sumption and in particular increasedinvestment activity fueled an accelera-



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tion of economic growth in 2003.

Consolidation measures will depressprivate consumption growth some-what in 2004 compared to 2003.Moreover, as the negative contribu-tion of net exports to growth is pro-

jected to diminish, economic growthwill remain at the 2003 level of3.0%. Towards the end of the forecasthorizon economic growth will accel-erate to almost 4%.

3.2 Recovery in the euro area slowlygaining ground

The recovery in the euro area is slowlyfeeding through to all demand aggre-gates. Nevertheless, it still has littlemomentum compared to other re-gions. In the second half of 2003, do-mestic demand was lackluster andgrowth was mainly propelled by ex-ports. There are, however, indicationsthat domestic demand will rebound.

Since the last quarter of 2003, invest-ment growth has been positive again.

Real GDP growth in the first quarter

of 2004, which was very strong(0.6%) according to preliminary esti-mates, was mainly driven by domesticdemand. This forecast does, however,not expect this dynamic growth tohold throughout the rest of 2004.

Despite the deterioration of pricecompetitiveness caused by the appre-ciation of the euro, exports play animportant role in the recovery. In2004, investment activity is presumed

to pick up again. 2005 and 2006 willsee a further expansion of investmentactivity due to accelerator effects. Pri-vate consumption will gather momen-tum amid the recovery, as disposablehousehold incomes will resume stron-ger growth. The labor market outlookremains subdued for the time being.Employment is not expected to makemuch headway until 2005.

Germanymay post signs of a mod-

erate improvement of the economicsituation, but the upturn is still very

Table 2

Underl ying Global Economic C ondi tions

2003 2004 2005 2006

Annual change in % (real)

Gross domestic productWorld GDP growth outside the euro area 4.5 5.3 4.9 4.8U.S.A. 3.1 4.6 3.6 3.0Japan 2.7 3.4 2.1 2.3Asia excluding Japan 7.2 7.3 6.4 6.6Latin America 1.2 3.6 4.8 4.7United Kingdom 2.2 3.1 2.9 2.8New EU Member States 3.5 4.2 4.6 4.7Schweiz 0.5 1.6 2.3 2.2

Euro area1 0.5 1.42.0 1.72.7 x

World tradeImports of goods and services World economy 5.4 7.2 7.6 7.7Non-euro area countries 7.1 8.2 7.9 7.7Real growth of euro-area export markets 5.8 7.8 8.0 7.8Real growth of Austrias export markets 3.7 6.1 7.2 7.6

PricesOil price (in USD/barrel of Brent) 28.9 34.6 31.8 29.2Three-month interest rate in % 2.3 2.1 2.1 2.1Long-term interest rate in % 4.1 4.3 4.4 4.5USD/EUR exchange rate 1.131 1.205 1.189 1.189Nominal effective exchange r ate (euro ar ea index) 99.91 101.65 100.89 100.8 9

Source: ECB.1 Results of Eurosystems spring 2004 projections. The ECB presents the results in ranges based upon average differences between actual outcomes

and previous projections.



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subdued. Currently, exports are the

main contributor to growth, whiledomestic demand has not shown anyindications of an upward trend. Inview of the three-year slump in invest-ment activity, there seems to be an in-creasing need for replacement invest-ment. However, the investment cyclehas apparently not gathered steamyet. Prospects for investment and pri-vate consumption chiefly depend on astabilization of business and consumer

confidence.The most recent survey data for

France indicate a stimulation of domes-tic demand. The most likely scenario istherefore a consolidation of the recov-ery. In Italy domestic demand devel-oped surprisingly well in the first quar-ter of 2004. Nevertheless, it is theworldwide economic recovery that willconstitute the driving force behind theprojected Italian upswing.

4 Austrian Exports

Benefit from Growth in

World Trade

This forecast is based on the assump-tion of strong world trade growth,primarily powerful trade growth in

the U.S.A. and in Asia (excluding

Japan). However, economic growthin Germany, Italy and Switzerland,all of which are important trade part-ners to Austria, will only be moder-ate. At the same time, the new EUMember States will provide a fast-growing target market for Austrianexports.

In 2003, Austrian exporters feltthe negative effects of the unfavorableexternal trade environment. Euro ex-

change rate movements in tandemwith the sluggish euro area economyled to near-stagnation (+0.8%) ofAustrian real exports of goods andservices in 2003. After declining inthe first half of 2003, however, Aus-trias exports recovered in the secondhalf, as was the case in the other euroarea countries. Export growth is ex-pected to reach 4.0% in 2004. As in2003, however, price competition will

entail a market share loss of over 2%.Although exports are expected to riseby 6.4% in 2005 and 7.5% in 2006,imports will grow commensuratelywith exports and domestic demandin 2004 and will even accelerate in2005. Therefore, the contribution of

Table 3

Growth and Price Developments, Austrian External Trade

2002 2003 2004 2005 2006

Annual change in %

ExportsCompetitors prices in Austrias export markets 2.5 6.7 1.4 1.4 1.2Export deflator 0.6 0.1 0.1 0.6 0.8Changes in price competitiveness 0.6 5.9 1.7 0.8 0.6Import demand in Austrias export markets (real) 0.7 3.7 6.1 7.2 7.6Austrian exports of goods and ser vices (real) 4.0 0.8 4.0 6.4 7.5Market share 3.3 2.9 2.1 0.9 0.1

ImportsInternational competitors pricesin the Austrian market 1.1 4.3 1.1 1.1 1.1Import deflator 2.0 0.8 0.3 0.7 0.6Austrian imports of goods and ser vices (real) 1.7 2.5 4.5 6.5 7.4

Terms of trade 1.3 0.7 0.2 0.1 0.2

Percentage points

Contribution of net exportsto GDP growth 1.2 0.8 0.2 0.1 0.2

Source: 2002 to 2003: Eurostat, 2004 to 2006: OeNB spring 2004 outlook, Eurosystem.



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net exports to GDP growth will fol-low a fairly balanced trend over theforecast period.

In 2002 as well as 2003, Austriascurrent account balance remainedwithin 1% of GDP; thus the currentaccount can be described as in bal-ance. The slight surplus in 2002(+0.2% of GDP) resulted from de-creasing imports due to sluggish do-

mestic demand, whereas the deficitin 2003 can be attributed to relativelystrong growth in imports coupledwith a weak export performance.On the basis of projected trade flows,Austrias trade surplus will shrinkslightly in 2004.

The two components of the tradebalance, goods and services, have fol-lowed opposing trends since the early1990s. While the services surplus has

diminished steadily, the goods accounthas shown continuous improvement(with the exception of 2003). Thistrend is expected to continue in amilder form over the forecast hori-zon. The geographical compositionof Austrias trade balance, which ischaracterized by a negative balancewith euro area countries and a sizeablesurplus with countries outside theeuro area, is not expected to change

between now and 2006.As in 2002, the income subac-

count posted a shortfall, which came

to 1.1% of nominal GDP in 2003.The direct investments made in Aus-tria in recent years are yielding in-creasing returns and thus offsettingthe earnings growth of Austrian directinvestments in Central and EasternEuropean economies. For the overallincome subaccount (income fromdirect investments, from portfolioinvestments and from other invest-

ments), a stable balance equaling,1.1% of GDP is projected for theyears 2004 and 2005. The currenttransfers balance which is mainly in-fluenced by EU transactions will re-main constant at 0.9% of GDP overthe forecast horizon. The overall cur-rent account balance will thus followthe development of the trade balanceand amount to some 1% of GDP.

5 Rise in Inflation to beDetermined by Energy

Component in 2004

The year 2003 saw a sharp drop ininflation in the first half of the year,followed by a slight increase in thesecond half. In 2004 to date, infla-tion has augmented further to 1.5%(measured as the increase in theHICP), with the service sector show-ing especially pronounced price rises.

As early as the second quarter of2004, inflation is projected to quickento 1.8%, a development which can

Table 4

Aus tria s C urrent Account2002 2003 2004 2005 2006

% of nominal GDP

Balance of trade 2.0 1.1 0.8 0.8 1.0Balance on goods 1.7 0.7 0.6 0.7 0.8Balance on services 0.3 0.4 0.1 0.2 0.2

Euro area 3.6 4.7 4.8 4.7 4.6Non-euro area countries 5.6 5.8 5.5 5.5 5.6

Balance on income 1.0 1.1 1.1 1.1 1.1Balance on current transfers 0.8 0.9 0.9 0.9 0.9Current account 0.2 0.9 1.2 1.1 0.9

Source: 2002 to 2003: OeNB, 2004 to 2006: OeNB spring 2004 outlook.



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holds with tax relief amounting to just

over EUR 1 billion per year. In con-junction with economic recovery, thiswill lead to heady growth in house-hold incomes in 2005, which will inturn boost consumption growth to2.1% and enlarge the saving ratio by0.4 percentage point.

6.2 Investment Backlog and

Favorable Financing Conditions

Boost Investment Activity

After two years of decline, investmentactivity surged at the beginning of2003. The investment ratio (invest-ments as a percentage of GDP) jumpedfrom 21.8% in the fourth quarter of2002 to 23.0% in the first quarter of2003. However, this value still fallsconsiderably below the high of 24.2%reached in the first quarter of 1998as well as being below the overall aver-age since 1995 (23.3%). During the

remaining months of 2003, no markedadditional increases in investment ac-tivity were recorded. On the whole,gross fixed capital formation rose by4.4% in 2003. Investment activity isexpected to pick up steadily from early2004 onward. Favorable financing con-ditions, the extension of the invest-ment tax credit and government sectorinvestments in transport infrastructurewill contribute to additional growth

in investment activity. The robust

increase of 4.4% seen in 2003 is not

likely to be matched in 2004; however,the projected rise by 3.3% still signalsstable investment activity. Financial ac-celerators are expected to boost in-vestment activity to 4.2% in 2005and 4.7% in 2006.

In 2005, the reduction of the cor-porate tax rate in the second stage ofAustrian tax reform will make Austriaa more attractive location for foreigninvestors. However, this is not ex-

pected to have a marked effect on in-vestment activity in the short term.

After six years of decline, residen-tial construction investment finally be-gan to climb in 2003 (by 1.7% in realterms), and this positive growth is ex-pected to continue. The results of thesurvey of lending business conductedin the first quarter of 2004 show thatdemand for residential constructionloans increased substantially in that

period. In 2004, residential construc-tion investment is expected to expandby 1.3% and to accelerate further to2.3% and 2.5% in 2005 and 2006,respectively.

Inventory changes (including stat-istical discrepancy) will make a mildlypositive contribution to GDP growthin 2004 and 2005, as businesses willbegin to build up inventories againduring the economic upswing.

Table 7

Private C onsumption in Austria2003 2004 2005 2006

Annual change in %

Disposable household income (nominal) 2.6 2.7 4.0 3.9Private consumption deflator 1.5 1.6 1.6 1.7Disposable household income (real) 1.0 1.0 2.4 2.2Private consumption (real) 1.4 1.4 2.1 2.1

% of nominal disposable household income

Saving ratio1 7.9 7.7 8.1 8.3

Source: 2003: Eurostat, 2004 to 2006: OeNB spring2004 outlook.1 Saving ratio (forecast from 2003).



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6.3 Strong Growth in Labor Supply

to Prevent Noticeable Decrease inUnemployment until 2006

In 2003, the Austrian labor marketsaw a slight increase in employment(0.2%) with simultaneously risingunemployment. Easier access to thelabor market for non-EU citizens(since early 2003) and the pensionreforms of the year 2000 have ex-panded Austrias labor supply by0.4%. This development will con-

tinue in 2004, as unemployment willcontinue to mount despite modestgrowth in employment. In early2004, positive signals were seen inthe number of reported vacancies,which advanced in April 2004 for

the third consecutive time. This figure

has traditionally been a sound leadingindicator for employment trends.

In 2005, employment growth willincrease to 0.6% in the wake of eco-nomic recovery; however, the rate ofunemployment will only decrease by0.1 percentage point to 4.4%. TheOeNB does not expect a noticeablereduction in the unemployment rateuntil 2006, when it is projected todrop to 4.1%.

Government-sector employmentwill continue to diminish in the com-ing years. The number of self-em-ployed will stagnate in 2004, while aslight gain is projected for 2005 and2006.

Austrias labor supply is expectedto build over the entire forecast

horizon. An increase of 0.3% is pro-jected for 2004, and the figure isexpected to continue rising in 2005and 2006. This can be attributed inpart to the fact that compared to othercountries Austrias labor supply reactsmore sensitively to the economy. Inaddition, various structural factorsalso contribute to labor supplygrowth. These factors include in-creases in marginal employment, the

rising number of non-EU citizensgaining access to the labor marketand the stepped-up labor force partic-

ipation of mature workers resultingfrom the pension reforms of 2000

and 2003.

7 Sustained Uncertainty

in Forecasts Due to Oil

Price Trends

This forecast presents the most likelyscenario for economic developmentin Austria (until 2006) from theOeNBs perspective. The projectedconsolidation of the economic up-swing in 2004 is essentially based on

improvements in international eco-nomic conditions and a recovery ofdomestic demand. However, this fore-

Table 8

L abor Market Developments in Austria

2003 2004 2005 2006

Annual change in %

Total employment 0.2 0.2 0.6 0.8

thereof:Payroll employment 0.3 0.3 0.7 1.0Self-employed 0.1 0.0 0.1 0.1Public sector employment 0.3 0.3 0.5 0.8

Registered unemployment 4.0 2.2 1.7 3.7Labor supply 0.4 0.3 0.5 0.6

%

Unemployment rate (Eurostat definition) 4.4 4.5 4.4 4.1

Source: 2003: Eurostat, 2004 to 2006: OeNB spring 2004 outlook.



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itive signals from the financial markets

are to be interpreted in a similar way.Equity indices rose markedly in thecourse of 2003, and lending seemsto have bottomed out during the year

as well. The lending volume in Austria

was lower year on year in the secondquarter of 2003, whereas lendinggrowth gained momentum steadily inthe second half of 2003.

The SNA figures published for the

expenditure side of GDP are a majorfactor in creating doubts as to thepublished quarterly profile. Weakgrowth in the second half of 2003can essentially be put down to thestatistical discrepancys highly negativecontribution to growth, which signalsa large difference between the pro-duction and the expenditure side ofGDP. The contribution of demandcomponents to growth (domestic de-

mand plus net exports), in contrast,rose 0.5 percentage point (to 1.1 per-centage points) compared to the firsthalf of 2003.

In this forecast, the growth patternfor 2003 has been corrected by in-creasing the carry-over effect for theyear 2004 by 0.3 percentage point;this was done by increasing the quar-

terly growth rate for the first forecast

quarter accordingly.Chart 2 illustrates the effects of

this data revision on GDP growthin 2004. In the left-hand diagram, his-torical data up to the third quarter of2003 (published in December 2003)are used in conjunction with the cur-rent forecasts quarterly growth ratesfrom the fourth quarter of 2003 on-ward (without the correction in thefirst quarter of 2004). This results in

an annual growth rate of 1.5% for2004. Extrapolating the data pub-lished in March 2004 with the pro-

jected values for 2004 would yield agrowth rate of only 1.2% for 2004(right-hand diagram, chart 2). Thedifference of 0.3 percentage point isentirely based on the difference incarry-over effects.

Table 11

Real GDP Growth Rates Published and Projec ted for 2003

on Various Dates

June 20031 September 20031 December 20031 March 20041

Quarterly growth rates in %

Q1 2003 0.17 0.02 0.12 0.51Q2 2003 0.162 0.26 0.34 0.01

Q3 2003 0.373

0.373

0.33 0.15Q4 2003 0.293 0.293 0.293 0.09

Annual growth in %

2003 0.88 0.87 0.75 0.88

Carry-over effect for annual growth in 2004

0.44 0.46 0.46 0.14

Source: Eurostat, OeNB.1 As at the time of Publication.2 OeNB spring 2003 outlook.3 OeNB fall 2003 outlook.

Note: Published data are shown in bold print.



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Chart 2

Effects of the Data Published in March 2004 on Annual GDP

Growth in OeNB Forecasts

Source: Eurostat, OeNB.

EUR billion

51.8

51.6

51.4

51.2

51.0

50.8

50.6

50.4

50.2

EUR billion

51.8

51.6

51.4

51.2

51.0

50.8

50.6

50.4

50.2

Data published inDecember 2003

Data published inMarch 2004

Realized

Forecast

Annual averages

Carry-over effect = 0.46%Annual growth in 2004 = 1.5%

Q12003

Q2 Q3 Q4 Q12004

Q2 Q3 Q4 Q12003

Q2 Q3 Q4 Q12004

Q2 Q3 Q4

Carry-over effect = 0.14%Annual growth in 2004 = 1.2%



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Annex 2:

Detailed Result Tables

Table 12

Demand C omponents (Real Pri ces )

at 1995 prices

2003 2004 2005 2006 2003 2004 2005 2006

EUR million Annual change in %

Private consumption 114,256 115,808 118,221 120,701 1.4 1.4 2.1 2.1Government consumption 36,911 37,081 37,192 37,290 0.7 0.5 0.3 0.3Gross fixed capital formation 46,834 48,359 50,410 52,756 4.4 3.3 4.2 4.7ther eof: Investment in plant and equipment 19,194 19,950 20,946 22,073 6.0 3.9 5.0 5.4

Residential construction investment 9,061 9,174 9,386 9,686 1.7 1.3 2.3 3.2Investment in other constructionand other investment 18,579 19,234 20,078 20,997 4.1 3.5 4.4 4.6

Changes in inventories(incl. statistical discrepancy) 757 918 1,240 1,224 x x x xDomestic demand 198,757 202,166 207,063 211,971 1.8 1.7 2.4 2.4

Expor ts of goods and ser vices 112,317 116,796 124,220 133,493 0.8 4.0 6.4 7.5Impor ts of goods and ser vices 108,051 112,965 120,259 129,143 2.5 4.5 6.5 7.4Net exports 4,266 3,831 3,961 4,350 x x x x

Gross domestic product 2 03,02 3 205,996 211,024 216,321 0.9 1.5 2.4 2.5

Source: 2003: Statistics Austria, 2004 to 2006: OeNB spring 2004 outlook.

Table 13

Demand C omponents (C urrent Pri ces )

2003 2004 2005 2006 2003 2004 2005 2006

EUR million Annual change in %

Private consumption 127,616 131,473 136,348 141,519 3.0 3.0 3.7 3.8Government consumption 42,009 43,174 44,388 45,614 3.3 2.8 2.8 2.8Gross fixed capital formation 51,188 53,663 56,750 60,260 5.9 4.8 5.8 6.2Changes in inventories (incl. statistical discrepancy) 2,001 2,116 2,464 3,144 x x x xDomestic demand 218,812 226,194 235,023 244,249 2.9 3.4 3.9 3.9

Expor ts of goods and ser vices 116,193 120,926 129,374 140,152 0.7 4.1 7.0 8.3Impor ts of goods and ser vices 112,743 118,174 126,669 136,905 1.7 4.8 7.2 8.1Net exports 3,450 2,752 2,705 3,247 x x x x

Gross domestic product 2 22,26 2 228 ,946 237,728 247,496 2.4 3.0 3.8 4.1


Table 14

Deflators of Demand C omponents

2003 2004 2005 2006 2003 2004 2005 2006

1995 = 100 Annual change in %

Private consumption 111.7 113.5 115.3 117.2 1.5 1.6 1.6 1.7Government consumption 113.8 116.4 119.3 122.3 2.6 2.3 2.5 2.5Gross fixed capital formation 109.3 111.0 112.6 114.2 1.4 1.5 1.4 1.5Domest ic demand (excl. changes i n i nvent or ies) 111.5 113.4 115.4 117.4 1.7 1.7 1.7 1.7

Expor ts of goods and services 103.4 103.5 104.1 105.0 0.1 0.1 0.6 0.8Imports of goods and services 104.3 104.6 105.3 106.0 0.8 0.3 0.7 0.6Terms of trade 99.1 99.0 98.9 99.0 0.7 0.2 0.1 0.2

Gross domestic product 109.5 111.1 112.7 114.4 1.5 1.5 1.4 1.6




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Table 15

L abor Market2003 2004 2005 2006 2003 2004 2005 2006

1,000 Annual change in %

Total employment 4,076.7 4,085.4 4,110.3 4,145.2 0.2 0.2 0.6 0.8thereof: Private sector employment 3,554.9 3,565.4 3,592.8 3,632.1 0.3 0.3 0.8 1.1Payroll employment (national accounts definition) 3,327.4 3,335.7 3,359.7 3,393.9 0.3 0.3 0.7 1.0

%

Unemployment rate (Eurostat definition) 4.4 4.5 4.4 4.1 x x x x

% of real GDP

Unit labor costs (whole economy)1 69.3 69.8 70.3 71.0 1.7 0.8 0.7 1.0

At 1995 prices, EUR 1,000

Labor productivity (whole economy) 49.8 50.4 51.3 52.2 0.7 1.2 1.8 1.6Real compensation per employee2 30.9 31.0 31.3 31.6 0.8 0.4 0.9 1.0

At current prices, EUR 1,000

Gross compensation per employee 34.5 35.2 36.1 37.1 2.4 2.1 2.5 2.7

At current prices, EUR million

Total gross compensation of employees 114,801 117,465 121,254 125,811 2.6 2.3 3.2 3.8

Source: 2003: Statistics Austria, 2004 to 2006: OeNB spring 2004 outlook.1 Gross wages as a ratio of real GDP.2 Gross wages per employee divided by the private consumption deflator.

Table 16

C urrent Account

2003 2004 2005 2006 2003 2004 2005 2006

EUR million % of nominal GDP

Balance of trade 2,477.7 1,737.4 1,929.7 2,473.6 1.1 0.8 0.8 1.0Balance on goods 1,654.1 1,397.5 1,563.9 2,087.0 0.7 0.6 0.7 0.8Balance on services 823.6 339.9 365.8 386.6 0.4 0.1 0.2 0.2

Euro area 10,417.4 10,908.9 11,166.3 11,267.2 4.7 4.8 4.7 4.6Non-euro area countries 12,895.1 12,646.3 13,095.9 13,740.7 5.8 5.5 5.5 5.6

Balance on income 2,457.6 2,498.0 2,540.0 2,641.0 1.1 1.1 1.1 1.1Balance on transfers 2,065.0 2,018.0 2,098.8 2,110.6 0.9 0.9 0.9 0.9Current account 2,044.9 2,778.6 2,709.2 2,278.0 0.9 1.2 1.1 0.9

Source: 2003: OeNB, 2004 to 2006: OeNB spring 2004 outlook.



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2 Asymmetry and Waning

of Effects over TimeVirtually every empirical study findsasymmetric effects. An increase in theprice of oil feeds through to GDPgrowth to a much larger extent thana decline. This phenomenon can beattributed to adjustment costs associ-ated with sectoral reallocations and theimplications of uncertainties for spend-ing on consumer durables and invest-ment. According to the so-called dis-

persion hypothesis, oil price hikes leadto a reallocation of resources fromenergy-intensive to energy-efficientsectors. As this reallocation progressesonly gradually due to adjustment costsinvolved, a short-term decline in out-put results, which intensifies the eco-nomic slowdown. On the other hand,when oil prices shrink, the conse-quent expansion of aggregate outputis dampened by adjustment costs. In

this connection, adjustment costs onthe labor market play an importantrole according to the dispersion hypoth-esis. Nominal wage rigidities also helpexplain asymmetric effects. When oilprices rise, employees will try to com-pensate the loss of their purchasingpower by negotiating wage hikes.However, increases in real purchasingpower caused by lower oil prices donot lead to sinking nominal wages.

Another explanation for these asym-metric effects is that decisions onwhether or not to buy consumerdurables and capital goods (cars, realestate, heating, insulation, productionfacilities, etc.) are often based onenergy prices. Oil supply problemsfuel uncertainty and lead to an abruptcontraction of such expenditures.Therefore, rising oil prices entail a de-cline in demand, while falling oil pri-

ces do not trigger a spike in demand.Since the 1970s the correlation be-

tween oil prices and GDP growth has

weakened. Technological innovation,

the development of cost-effective al-ternative sources of energy and sec-toral change have diminished the ratioof oil imports to GDP in industrial-ized countries.

Modeling the correlation betweenoil prices and GDP growth is difficultnot only because of the reduced im-pact of oil prices on GDP, but alsobecause of changes in oil marketstructures. With the Organization of

the Petroleum Exporting Countries(OPEC) influence receding after1980, oil prices have been increasinglydependent on demand (endogeneityproblem). Furthermore, oil priceshave become much more volatile sincethe introduction of forward and fu-tures markets in the 1980s. In additionto that, central banks have changedtheir ways of reacting over time,which has contributed to the fading

influence of oil prices on growth.These altered statistical propertieshave made it impossible for simple lin-ear models to adequately describe theimpact of oil prices on GDP growth.Empirical research thus predomi-nantly uses nonlinear specifications(see e.g. Hooker, 1999a; Hamilton,2003) and finds a relatively stable cor-relation between oil prices and GDPgrowth for the entire postwar period.

Lee et al. (1995), for instance, trans-form the oil price, dividing the oilprice change by the current volatility.Their study is also a first step towardsmeasuring the element of surprise in oil

price changes. Accordingly, when a risein the price of oil follows a prolongedperiod of stable oil prices (duringwhich theres is small current vola-tility), it has a stronger impact thana price hike which comes as an imme-

diate adjustment of previous pricedrops.


The Impact of Oil Price Changes

on Growth and Inflation

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policy and believe there are stronger

direct effects. There are, however, alsostudies describing an expansive effect ofmonetary policyin the wake of oil priceshocks. Hooker (1999a), for example,has studied the impact of oil prices onU.S. inflation. While oil pricesstrongly affected core inflation priorto 1980, their influence conceivableregressed thereafter. Hooker ascribesthis structural break to a shift in themonetary policy response. His VAR

simulations, which use empiricallyestimated reaction functions of theFed, indicate that before 1980, theFed always answered oil price hikeswith a considerable loosening of mon-etary policy. Its responses after 1980were much weaker.

Overall it can be said that empiri-cal evidence varies greatly. Changes inthe structure of the oil markets, in de-mand patterns and in the reaction of

monetary policymakers make it diffi-cult to produce reliable empirical out-comes. On top of that, the commonlyused VAR models are very sensitive tochanges in specifications.

4 Oil Price Developments

since World War II

Oil price developments since WorldWar II up to the end of the 1990scan roughly be divided into three

stages. Leading up to the 1970s, nom-inal oil prices were stable, while realoil prices slightly fell. The 1970s andearly 1980s were characterized bythe two oil price shocks of 197374and 197980 with skyrocketing oilprices. After oil prices shrank in thefirst half of the 1980s, nominal oilprices fluctuated up until the 1990saround a relatively stable value ofUSD 15 to USD 20, with some tem-

porary deviations. Even the surge inthe run-up to the first war in Iraq re-versed quickly. In terms of percentage

increase the oil price hike of 1999

2000 is comparable to the second oilprice shock of 197980. In 2001and 2002 the global economic down-turn triggered a temporary plunge inoil prices, which have picked up con-siderably again since the second war inIraq was announced.

The first oil price shock of 197374was fueled by several factors. Even be-fore the oil embargo was launched as areaction to the Yom Kippur War in

October 1973, global demand for oilaccelerated immensely. The worldeconomy at that time was at a stagemarked by strong growth and lowinterest rates. Currency turmoil ledto the collapse of the Bretton WoodsSystem in 1973, ultimately resultingin the abandonment of the previouslyeffective system of fixed exchangerates. The industrialized countrieshad already posted high inflation rates

prior to the oil price shock, and thedollar sharply depreciated. These de-velopments and the production cutsinduced by the oil embargo causedoil prices to quadruple within a shorttime. The recession following the firstoil price shock was aggravated by sev-eral factors. Monetary policymakersin the industrialized nations at thattime were unable to quickly fight in-flation. This brought about a change

in inflation expectations. The thenprevalent wage indexation and the in-stitutional wage formation structuresadditionally intensified inflation.

The second oil price shock of197980 hit closely after the Iranianrevolution in late 1978 and beforethe outbreak of the war between Iranand Iraq in October 1980. The inter-national macroeconomic environmentwas posting solid growth, low interest

rates and rising inflation, much like inthe early 1970s. Contrary to the firstoil price shock, the decline in the




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worldwide oil supply was only tempo-

rary, as shortfalls in production in Iranand Iraq were offset by expanded out-put of other oil producers. Most ofthe price increase took place betweenthe Iranian revolution and the out-break of the war. At that time globalproduction exceeded prerevolutionlevels, which means that shortfalls inoutput cannot serve as an explanation.Rather, current demand expanded as aconsequence of heightened uncer-

tainty about possible future shortages

and assumed high demand. The mon-etary policy responses focused on re-taining price stability to a much largerdegree than during the first oil priceshock. In 1979 the Fed started to ac-tively fight inflation. However, infla-tion expectations, which had risenduring the first oil crisis, renderedthe real economic costs of containinginflation significant.

In the 1980s OPECs possibilitiesto intervene in prices dramatically re-ceded. Oil supply of non-OPEC coun-tries picked up as new oil producerscame into existence and other coun-tries, in particular the U.S.A., Mexico

and the then USSR, stepped up out-put. At the same time the globalslowdown of the economy lesseneddemand. This served as an incentivefor OPEC producers to expand theirmarket share and consequently theirrevenues by offering low prices.When Iraq invaded Kuwait in August1990, the first Gulf War started. Inthe run-up to the war there was a no-table rise in oil prices triggered by the

high level of uncertainty. As soon asthe war started, this uncertainty dis-solved and prices quickly fell. During

the ongoing military operations seri-ous shortfalls in production occurred,which were, however, compensatedby an increase in output by othercountries. As the war went on, oil pri-ces remained stable. After plummet-

ing amid the Asian crisis of 199798, they rose sharply in 19992000when global demand heated up. Si-multaneously, OPEC regained someof its market power.

When looking at the real price ofoil for Austria in euro or schillings(chart 1), the extent of the first oilprice shock becomes much more evi-dent. The second oil price hike in197980 had a long-term effect on

Austria because the U.S. dollar appre-ciated in the wake of the hike. The re-cent oil price increase has been damp-

Chart 1

Historical Oil Price Movements

Source: IMF, Statistics Austria.

60

50

40

30

20

10

0

USD/barrel (Brent)

EUR (ATS)/barrel (Brent), deflated by the Austrian consumer price index

1966 1971 1976 1981 1986 1991 1996 2001




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ened by the appreciation of the euro.

Although the current level of thenominal oil price is comparable tothe highest level reached during thesecond oil price shock of 197980,the real price in euro is still consider-ably below half of that value.

There is continuing controversyabout what exactly are the determi-nants of oil price trends. Hamilton(2003) argues that the political andmilitary actions leading up to oil crises

are directly responsible for pricehikes, whereas Barsky and Kilian(2001) stress the role of a favorablemacroeconomic environment as a pre-requisite for price rises. Jones andLeiby (1996) have found that oil priceincreases in the 1970s can be attrib-uted to OPECs cartel power ratherthan to shortfalls.

5 An Overview of Current

Oil Price ElasticitiesThe oil price elasticities of growth andinflation presented here are eitherbased on macroeconomic models(Dalsgaard et al., 2001; Hunt et al.,2001; International Energy Agency,2004) or on VAR or Structural Vec-tor Autoregressive (SVAR) models(Abeysinghe, 2001; Jimenez-Rodri-guez and Sanchez, 2004). Hunt etal. (2001) applied the MULTIMOD

model of the International MonetaryFund (IMF). The simulations descri-bed by the International EnergyAgency (2004) were conducted bythe Organisation for Economic Co-operation and Development (OECD),using the Interlink model.

Most macroeconomic models canonly be used to a limited extent for

analyzing the response of an economy

to an oil price shock. For instance, theOECD and IMF models just like themacroeconomic model of the OeNB depict the entire supply side of aneconomy in one production function.Therefore, shocks setting off sectoralreallocations cannot be representedadequately. Furthermore, most mod-els fail to depict asymmetries (Joneset al., 2002). Elasticities thereforetend to be underestimated.1 The in-

tensity of the effects of oil priceshocks in macroeconomic modelsdecisively depends on wage and priceresponses (and in particular on howinflation expectations are modeled),but also on the respective monetarypolicy reaction function. The simula-tions conducted by Abeysinghe (2001)and by Jimenez-Rodriguez and San-chez (2004) are based on VAR mod-els. These time-series models depict

the dynamic interaction between alimited number (generally three tofour) of macroeconomic variablessuch as GDP, oil prices and interestrates. Ciscar et al. (2004) used a mul-tiregional static General Equilibriummodel for their calculations, whichcomprises 21 regions of the worldand 20 sectors per region. The modelcalculates equilibrium prices at whichthe respective markets are cleared.

Unlike most macroeconomic models,this model distinguishes between dif-ferent sectors, permitting not onlyincome effects but also the sectoralreallocations deriving from oil priceshocks to be simulated. The modelpresupposes flexible prices. The ef-fects of price rigidities (especially onthe labor market) are therefore not

1 Apart from macroeconomic models and VAR models, there are two more types of models for estimating oil priceeffects: Aggregated production functions, which were already used in the 1970s, define GDP as a function of

production factors such as labor, capital and energy. The real business cycle approach attributes the pattern ofbooms and busts to the response of the economy to random exogenous shocks. Jones and Leiby (1996) provide adetailed overview of studies applying these different types of models.




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depicted. These simulations do nottake into account policy reactions.

Given the use of different models

and varying definitions of scenarios,the results of the individual studiesare comparable only to a limited de-gree. As the simulations are based ondifferent presumptions about the oilprice change, the results have beenscaled assuming linearity to a10% increase.

The simulation results shown intable 1 are the average deviations ofGDP growth rates and inflation in

the first three years following an oilprice shock. The simulations show adeceleration of GDP growth by about0.1 percentage point a year in the firsttwo to three years. Subsequent growtheffects (as far as reported) can beneglected. On average, the euro areaand the U.S.A. are equally affected,with Japan feeling a much smallerimpact. The relative effect on thethree major economies varies across

the studies. The impact on inflationranges from 0.1 to 0.2 percentagepoint. In two out of three studies the

euro area feels a stronger burden thanthe U.S.A.

The extent to which various

countries or economies are affecteddepends on several characteristics.Important aspects are energy intensity(oil consumption relative to GDP),the sectoral structure of the economy,disposable stocks, the mineral oil taxsystem (specific or ad-valorem tax),citizens preferences, economic policyresponses, the existence and amountof oil reserves and the structure ofthe labor market and the labor market

institutions.In its simulations, the OECD

(Hunt et al., 2001) finds oil pricehikes to have consistently positive ef-fects on the global economy. It reportsa 0.1 percentage point increase inGDP on the initial value within threeyears for the entire OECD area andan even higher increase (0.2 percent-age point) for the euro area. Theseeffects are attributed to expanded

demand for imports by oil exportingcountries. They have, however, notbeen confirmed by other studies.

Table 1

Effects of a Permanent 10% Increase in Oil Prices in U.S. Dollars1

Model GPD Inflation

Euro area U .S.A. Japan Euro area U .S.A. Japan

Average deviation of growth rates in percentage points

Hunt, Isard and Laxton (2001) IMF Macro 0.05 0.06 0.01 0.28 0.18 0.08International Energy Agency (2004) Macro 0.12 0.07 0.10 0.14 0.10 0.08Dalsgaard. Andre and Richardson (2001) OECD Macro 0.04 0.00 0.02 0.04 0.02 0.00Jimenez-Rodriguez and Sanchez (20 04) ECB VAR 0.06 0.17 0.18 x x xAbeysinghe (2001) SVAR x 0.05 0.03 x x xCiscar et al. (2004) CGE 0.102 0.09 0.10 x x xAverage 0.06 0.07 0.01 0.15 0.10 0.05Average excluding the OECD (2001) 0.09 0.09 0.01 0.21 0.14 0.08

Austria Austria

OeNB (2004) Macro 0,02 0,06

Notes: CGE: Computable General Equilibrium model. Macro: Macroeconomic model. VAR: Vector Autoregressive model. SVAR: Structural Vector Autore-

gressive model.1 Thevalueslistedin thetable depicttheaveragedeviationof GDP growthratesandinflation ratesduringthefirstthreeyearsfollowingthe oilpriceshock.

The only exception are the results of Ciscar et al. (2004), whichare comparative static results, i.e. they show the deviation between the old and the new

equilibrium. For reasons of comparability, this deviation was converted into annual growth rates, assuming a three-year adjustment period to the new

average.2 Result for the entire EU.




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6 An Oil Price Scenario for

AustriaWith oil prices currently at a high, itseems particularly interesting to in-vestigate their impact on the Austrianeconomy. The OeNB Spring Outlook2004 for the years 2004 to 2006 as-sumes oil prices of USD 34.6, USD31.8 and USD 29.2 per barrel ofBrent oil for each successive year.These projections are based on the fu-tures prices of May 17, 2004. Accord-

ing to the oil price scenario, priceswill come to USD 40 as of the thirdquarter and will remain at this leveluntil the end of 2006. The effects ofthis assumption have been simulatedwith the OeNBs macroeconomicmodel. A series of additional technicalassumptions had to be made. In par-ticular, constant monetary policy con-ditions, i.e. unchanged nominal inter-est rates, had to be presupposed. Fur-

thermore, the simulation was basedon constant exchange rates. An oilprice shock is a global shock with re-percussions on the entire world econ-omy. Ideally, such a shock is simulated

with a global model. The simulation at

hand takes reactions of other euro areacountries to the oil price shock intoaccount by considering elasticities.However, as it fails to regard globalreactions outside the euro area, effectsare largely underestimated.

In the model the oil price shocktakes effect through different mecha-nisms. Increasing import prices causedomestic price levels to rise, whichdiminishes real disposable private

household income and thus consumerspending. At the same time Austrianexport prices pick up. Whether andto which extent exporters then be-come less competitive depends onthe degree of price hikes by Austriascompetitors on its export markets.An increase in domestic prices results,ceteris paribus, in a substitution of do-mestic goods by imports. Investmentis determined by two contrary effects.

The sinking general level of activityreduces investment demand, whilethe rising price level at unchangednominal interest rates lessens thereal user cost of capital and thus

Chart 2

The Impact of a Permanent Increase in Oil Prices to USD 40

on Growth and Inflation in Austria

Source: OeNB calculations.

in USD/barrel (Brent)

40

35

30

25

20

15

10

5

Deviation from the baseline scenario in percentage points

0.80

0.60

0.40

0.20

0

0.20

0.40

0.60

Oil price assumptions Effects

ScenarioOeNB Spring 2004 outlook

Q12004

Q12005

Q12006

InflationGDP

Q12004

Q12005

Q12006




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Jimenez-Rodriguez, R. and M. Sanchez. 2004. Oil Price Shocks and Real GDP Growth: Empirical

Evidence for some OECD Countries. European Central Bank Working Paper 362.

Jones, D. W., D. J. Bjornstad and P. N. Leiby. 1997. The Findings of the DOE Workshop on Economic

Vulnerability to Oil Price Shocks: Summary and Integration with Previous Knowledge. 2 nd draft. Mimeo.

Jones, D. W. and P. N. Leiby. 1996. The Macroeconomic Impacts of Oil Price Shocks: A Review of the

Literature and Issues. Oak Ridge National Laboratory.

Jones, D. W., P. N. Leiby and I. K. Paik. 2002. Oil Price Shocks and the Macroeconomy: What Has

Been Learned since 1996. In: Proceedings of the 25th Annual IAEE International Conference, Aberdeen,

Scotland, June 2629, 2002.

Lee K., S. Ni und R. A. Ratti. 1995. Oil Shocks and the Macroeconomy: The Role of Price Variability.

In: Energy Journal, 16/4. 3956.




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This study examines sectoral specialization patterns in the EU-15 and in the euro area as well as in

Austria. These patterns have policy relevance in so far as a high degree of sectoral specializationmay trigger asymmetric shocks, foster the emergence of inflation differentials and impact on long-term

growth. The developments seen since 1980 have created a favorable climate for conducting the single

monetary policy; the degree of sectoral specialization is low in Austria and the EU, it has changed only

moderately and has caused neither cyclical nor inflation differentials. At the same time, the individual

sectors shares in value added have changed, in some cases even dramatically. However, there are signs

both in the euro area and in Austria that the current sectoral specialization patterns provide suboptimal

conditions for long-term growth.

1 The Economic and

Monetary Policy

Implications of SectoralSpecialization

The sectoral specialization pattern ofan economy defined as the contribu-tion of the individual economic sec-tors to value added and employmentin a given country is of relevanceto monetary and economic policiesfor several reasons:

Asymmetric Shocks and

Economic CyclesOne of the most widely discussed is-sues prior to the start of Economicand Monetary Union (EMU) was thepossibility of asymmetric shocks, thatis, the possibility of economic shocksoccurring in limited areas within theeuro area, which would cause differ-ences in business cycles. The degreeof specialization of a countrys or a re-gions economy, and, consequently,

the level of dissimilarity to anothereconomy in the monetary union, isproportionate to the probability ofasymmetric shocks the single mone-tary policy is unable to respond to(for an overview of possible sourcesof shocks and their occurrence, seeBayoumi and Prassad, 1996).

Inflation Differentials

If the price dynamics in different

sectors diverge, an increasing degree

of sectoral specialization may causeinflation differentials between coun-

tries to widen, which will in turnmake it more difficult to pursue acommon monetary policy. Inflationdifferentials can be traced to a largevariety of reasons, including cyclical,but also external factors like ex-change rate fluctuations and oil priceshocks. Egert et al. (2004) show thatin Europe inflation differentials havenarrowed markedly over the past tenyears.

Long-Term Growth

Some endogenous growth models1

(e.g. Lucas, 1988) suggest that thegrowth rate is contingent on the sizeof the innovative sector; more re-cent empirical studies (e.g. Penederet al., 2001) indicate an interrelation-ship between sectoral specializationand economic growth (e.g. throughthe positive externalities of research

activities). Hence, countries with ahigh degree of specialization in tech-nology-intensive sectors would enjoygrowth advantages in the long run.This estimation of potential is essentialfor assessing the level of inflation-freegrowth, i.e. the rate at which aneconomy can grow without buildingup inflationary pressures.

On the basis of selected indica-tors, chapter 2 illustrates how sectoral

specialization patterns have evolved in

1 Models which do not take technological progress for granted but give an explicit explanation.

Jurgen Janger,

Karin Wagner


Sectoral Specialization

in Austria and in the EU-15

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Austria and in the EU-152 and de-

scribes a number of important deter-minants of and factors influencing sec-toral specialization. Chapter 3 is dedi-cated to sectoral specialization andlong-term growth in Austria and inthe EU-15. Chapter 4 concludes onthe basis of the developments descri-bed in the earlier chapters.

2 Development and

Determinants of

Sectoral SpecializationIn contrast to the U.S.A., productionstructures in the EU-15 countries arerelatively homogeneous in terms ofthe individual sectors contributionto value added (ECB, 2004). More-over, specialization indicators showthat specialization patterns changevery slowly and consistently (table 1).What is most striking is the shift

towards the service sector, in particu-

lar towards business services. Only afew countries see increased specializa-tion in technology-intensive industries(e.g. Finland).

2.1 Changes in Sectoral Specialization

Patterns

2.1.1 Growing Service Sector

A direct comparison between the EU-15 and Austria (chart 1) reveals thatthe Austrian economic structure

largely matches the EU-15s. At20.5% in 2002 (2001: 21.2%), thecontribution of manufacturing to totalvalue added is higher in Austria than inmany other EU countries, but like inmost EU Member States it is trendingdownwards. The construction indus-trys share in value added in Austriais closer to the ratios recorded inthe cohesion countries Spain, Portugal

2 The results for the EU-15 are based on a project of the European System of Central Banks (ESCB) and arepublished in ECB (2004).

Table 1

Sectoral Specialization Measured by Value-Added at Constant Prices

1980 1990 2001

Agricul-

ture and

forestry

Manufac-

turing

Business

services

Con-

struction

Other Agr icul-

ture and

forestry

Manufac-

turing

Business

services

Con-

struction

Other Agr icul-

ture and

forestry

Manufac-

turing

Business

services

Con-

struction

Other

Share in %

Belgium 1.4 19.9 43.0 6.9 28.8 1.4 21.5 44.4 5.3 27.4 1.5 20.6 46.3 4.9 26.6Germany 1.5 28.0 36.6 8.6 25.4 1.4 26.1 41.5 6.8 24.1 1.2 20.1 48.0 4.8 25.8Greece x x x x x 8.5 14.7 49.4 7.9 19.5 8.1 12.4 54.8 7.6 17.1Spain 7.4 19.9 44.9 6.9 20.8 5.9 18.5 44.8 8.0 22.8 4.0 18.7 45.7 8.1 23.5France 3.6 21.5 43.7 7.0 24.2 3.2 18.3 48.3 6.7 23.4 3.1 19.2 48.7 4.3 24.6Ireland x x x x x 9.6 24.1 x 5.2 x 4.9 37.0 x 5.2 xItaly 4.2 23.4 42.4 6.6 23.4 3.1 21.9 47.0 5.8 22.2 3.1 21.2 50.3 5.0 20.5Luxembourg x x x x x 1.0 14.5 49.1 6.7 28.7 0.6 11.5 56.3 5.6 26.1

Netherlands 2.7 17.5 41.3 7.9 30.6 3.3 17.9 43.2 6.3 29.2 3.0 16.9 49.6 5.2 25.3Austria 2.5 20.9 39.9 8.7 28.0 2.3 20.7 44.2 7.0 25.9 2.4 21.2 46.7 7.1 22.6Portugal 6.3 24.5 37.6 7.9 23.7 5.9 21.8 39.9 6.7 25.7 4.6 20.4 43.4 6.9 24.7Finland 6.6 22.1 37.3 7.2 26.8 4.7 21.7 41.0 6.7 25.8 3.7 28.8 41.2 4.0 22.3

Euro areaweightedaverage 3.2 23.7 40.6 7.6 25.0 2.9 21.8 44.6 6.5 24.2 2.5 19.8 48.2 5.3 24.1

Denmark 2.8 18.3 43.9 6.4 28.5 3.4 16.9 45.9 5.1 28.7 3.7 16.6 48.4 4.3 27.0Sweden 2.8 20.5 x 5.8 x 2.8 19.7 40.7 5.5 31.3 2.1 24.4 44.7 4.0 24.8UnitedKingdom 2.1 24.6 42.2 5.2 25.9 2.0 22.6 45.0 6.0 24.4 1.3 18.3 50.9 4.8 24.7

EU weightedaverage 3.0 23.7 40.9 7.3 25.1 2.8 21.8 44.6 6.4 24.5 2.4 19.7 48.5 5.2 24.3

Source: OECD, European Commission, ECB.




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and Greece rather than to those meas-ured in the EU countries with above-average per-capita GDP.

The changes over time (1980 to2002) clearly reflect the Austrianeconomys albeit slow shift to-wards the service sector. Agriculture,hunting and forestry contracted from4.2% to 2.3%, mining and quarrying

from 1.4% to 0.4%, manufacturingfrom 22.8% to 20.5%. By contrast,the biggest growth industries were realestate, renting and business services(including IT services), gaining 7.4%to reach 17.2%, as well as financialintermediation, growing by 5.7% to6.4%.

The individual sectors growth rates

mirror this development: while thetertiary sectors posted above-averagerates, the secondary and, in particu-

lar, the primary sectors expanded

at below-average rates. The dynamicgrowth of business services (consult-ing, software, research services, etc.)

Sectoral Contribution to Value Added in 2001

40

30

20

10

0

Chart 1

Source: ECB (2004).

%

Austria

EU-15

Services Other Industry Construction Agriculture

Gross Value Added in Austria

Chart 2

Share in gross value added total in %

1980

2002

Agriculture, hunting

and forestry, fishing

Mining and quarrying

Manufacturing

Electricity, gas and

water supply

Construction

Wholesale and retail trade; repair of

motor vehicles and personal and

household goodsHotels and restaurants

Transport and

communications

Financial intermediation

Real estate, renting

and business services

Public administration and defence,

compulsory social security

Other services

25

20

15

10

5

0




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presentation, however, masks the insome cases considerable shifts in in-dividual sectors shares in value added.

2.1.3 Specialization by Employment

Reflects Divergent Sectoral

Productivity Growth Rates

In terms of employment, the Austrianeconomy is characterized by a large

services sector and the predominanceof small and medium-sized enterprises(SMEs). In 2002, 83.7% of businessesemployed 1 to 9 people, 13.2% em-ployed 10 to 49 people. In otherwords, some 97% of enterprises em-ploy a staff of less than 50, and only0.4% of Austrian businesses havemore than 300 employees. All in all,the primary sector accounted for0.8% of payroll employment and

contributed 2.25% to GDP in 2002.By comparison, 28.7% of all em-ployees worked in the secondary sec-

tor (contribution to GDP: 30.45%),and 70.4% in the tertiary sector(contribution to GDP: 62.4%). Be-tween 1995 and 2002 a marked shifttook place from the secondary sector(6.8%) toward the tertiary sector(+7.8%). The biggest growth indus-tries were real estate, renting andbusiness services (+50.4%), health

(+22.6%) and other community,social and personal service activities(+20.6%).

The change in absolute shares inemployment also mirrors the diver-gent productivity growth across sec-tors. While the manufacturing sec-tors share in value added contractedonly slightly, its share in employmentdropped by a significant 10 percentagepoints.

Labor productivity in manufac-turing increased twice as rapidly, onaverage, as productivity in services

Krugman Specialization Index

Chart 3

Source: OECD, Eurostat, ECB calculations.

19962001

19901995

19851989

19852001

UK

BL

SE

IT

DK

FR

EU

NL

Euro area

AT

DE

FI

PT

LU

ES

GR

FR

UK

AT

BL

EU

ES

Euro area

DK

IT

DE

SE

NL

FI

IR

PT

LU

GR

0 0.2 0.4 0.6 0.80 0.2 0.4 0 0.2 0.4

UK

SE

BL

DK

NL

IT

FR

EU

FI

Euro area

DE

GR

AT

ES

PT

LU

Total economy Manufacturing Business services




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Change in Sectoral Shares in Total Employment from 1980 to 2002

Chart 4

Source: OeNB, Statistics Austria.

2002

1980

Other services

Manufacturing

Wholesale and retail trade; repair of motor vehicles

and personal and household goods

Construction

Public administration and defence,

compulsory social security

Transport, storage and communications

Real estate, renting and business services

Hotels and restaurants

Financial intermediation

Electricity, gas and water supply

Agriculture, hunting and forestry


0 5 10

%

15 20 25 30 35

Labor Productivity Growth from 1985 to 2001

Chart 5

Source: ECB (2004).

EU-15

Austria

Agriculture

Manufacturing

Electricity, gas and water supply


Total economy

Construction

Business services

Community, social and personal services

1 0 1

Change in %

2 3 4 5 6 7

42 Mone tary Poli cy & th e Ec onom y Q2/ 04



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2.2 Determinants of Sectoral

SpecializationTheory is ambiguous about the deter-minants of sectoral specialization.There is no clear evidence that thegrowing integration of product andfactor markets triggered by the EUhas unleashed an obvious trend to-wards increasing or decreasing special-ization. While traditional trade theoryholds that stepped-up trade fostersspecialization, new trade theory (in-

complete competition due to returnsto scale) sees a convergence of produc-tion structures. New economic geog-raphy stipulates that the agglomerationor dispersion of economic activityhinges on the level of trading costs:economic integration reduces trans-port costs, barriers to labor mobilityand transaction costs.6

In an econometric investigation,Midelfart et al. (2000) find that, in

general, growing economic integra-tion in tandem with declining eco-nomic policy intervention at the na-tional level cause sectoral specializa-tion or the choice of production sitesto be increasingly driven by marketforces (e.g. competition in the prod-uct markets). Furthermore, industriesthat depend on tight supplier and cus-tomer relations (e.g. because of hightransport costs) tend to settle close

to economic hubs. In high-technologysectors, specialization clearly dependson the availability of adequately quali-fied labor. Taking into account thesefindings, in the following we will in-vestigate to what extent competition,EU accession and EU enlargementpromote agglomeration and look atthe role of Austrias human resourcesin the process of specialization. In ad-dition, we will illustrate develop-

ments in national sectoral aid poli-

cies, sectoral regulation, foreign directinvestment (FDI) and sectoral capitalratios.

2.2.1 EU Accession Has Enhanced

Competition

Competition, promoted under theframeworks of the World Trade Or-ganization (WTO) and the EU, hasfueled structural change, i.e. a shifttowards more technology-intensive

industries, also in Austria, albeit asmentioned above at a comparativelyslower pace. As expected, Austriasaccession to the EU in 1995 increasedcompetition in certain sectors, whichalso impacted considerably on pricedevelopments. After the Austrianeconomys competitiveness had de-clined due to exchange rate develop-ments in the early 1990s, it startedto improve in mid-1995 (Hahn et

al., 2001). In other sectors, however,there is no clear evidence of a struc-tural break, with the exception ofmotor vehicle and parts manufactur-ing, whose positive development canbe traced to an ambitious regionalpolicy and to major corporate reloca-tions. Although the shift away fromthe clothing and food industriesstarted already before EU accession,it may have been accelerated by the

latter.Another aspect of economic inte-

gration is financial integration amongthe EU Member States, which entailsthe possibility of cross-border riskdiversification and thus may also fos-ter sectoral specialization. This fa-cilitates the full utilization of compa-rative advantages (Kalemi-Ozcan etal., 2003). Yet, empirical studies showthat despite increased economic inte-

6 For a comprehensive outline of determinants of sectoral specialization in theory, see Wolfmayr-Schnitzer(1999).




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gration, risk diversification in the euro

area has not improved significantly sofar.7

2.2.2 Austrian Industry Feels Demand

Effects Caused by Transition and

EU Enlargement

The opening up of Eastern Europe hastriggered long-term demand effects inAustrias industrial sector; Austriasmoving to the center of the EU maybring about positive agglomeration

effects (i.e. an increase in businessrelocations). In terms of external tradeand foreign direct investment (FDI),Austria has the closest ties with thenew EU Member States in Centraland Eastern Europe. In 2003, the Cen-tral and Eastern European countries ab-sorbed 45% of Austrias outward FDI,with banks remaining a key force inthe internationalization of Austrianbusiness. Austrias neighbors Hungary,

Slovenia, the Czech Republic, the Slo-vak Republic and Poland account forsome 12% of Austrias exports.

A number of studies (e.g. Aigingeret al., 1993) point out that the effectsof transition vary considerably acrosseconomic sectors in Austria and pro-vide estimations of indirect effects(Luptacik and Wagner, 1998). Theseeffects, however, are mostly of along-term nature. An examination by

Wolfmayr-Schnitzer (2004) identifiespositive effects for the manufacturersof machinery, medical, precision andoptical instruments as well as leather,and fairly positive effects for thechemicals sector, communicationsequipment as well as publishing andprinting. By contrast, the textiles andtextile products, construction mate-rial, wood and wood products as wellas metal industries face a more diffi-

cult competitive situation. Given its

overall positive foreign trade balance,

the wood and wood products sectormay benefit from intermediate inputfrom the neighboring countries.

2.2.3 Austrian State Aid Focused on

Horizontal Measures

For Austria, there are no comprehen-sive analyses of measures specificallydesigned to support certain indus-tries. State aid policies have mostlybeen analyzed from a horizontal per-

spective (R&D measures, etc.). Still,according to the European Commis-sions State Aid Monitor, sectoral sub-sidies account for just about 11% oftotal state subsidies in Austria,whereas the lions share is used to fi-nance horizontal measures (R&D, en-vironmental measures, SME promo-tion, education). At 1.1% of GDP,Austrias state aid ratio was belowthe EU average in 2002 and has also

been going down in absolute figures.What these figures conceal, how-

ever, is the effect regional subsidies,which up to a point are geared to spe-cific industries. For instance, the suc-cess of Austrian car component sup-pliers has been made possible, amongother things, by the proactive clusterpolicy pursued by two regional gov-ernments: the automobile clusters ofStyria and Upper Austria have devel-

oped into large networks of busi-nesses. Likewise, Viennas biotechnol-ogy cluster (pharmaceutical industry)has grown strongly in recent years,not only in terms of research activitiesbut also in terms of turnover. The re-gional governments support these ini-tiatives not only financially, but also inorganizational matters (e.g. in initiat-ing or organizing networks).

An analysis of federal government

subsidies granted between 1989 and

7 See, e.g., Moser, Pointner and Scharler (2003).




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2002 shows that throughout the re-

porting period, hotels and restau-rants, the chemicals sector as well asmanufacturers of machinery andtransport equipment received thehighest subsidies. Again, these figuresmask a shift in the focus of subsidiesthat occurred after Austrias accessionto the EU: After 1996 manufacturersof radio, television and communica-tion equipment as well as manufactur-ers of metal products and research

institutions received a comparatively

larger share of subsidiaries. Conse-quently, the above-average growthrecorded by tourism is not only trace-able to higher demand (fostered byrising incomes) and Austrias attrac-tiveness as a holiday destination, butalso to large-scale state subsidies. Itwould be desirable that in the future,a larger share of subsidies be spent onknowledge-intensive services.

2.2.4 Is a Lack of University Graduates

an Obstacle to Specialization in

Knowledge-Based Sectors?

Compared with other EU countries,the share of university graduates in

Austria is relatively small, even ifgraduates of secondary technical col-leges (HTL) are factored in. In Aus-

tria, only 0.7% of 20- to 29-year-oldshold a tertiary degree in science orengineering, against 2.3% in Ireland,2% in France and 1.6% each in theUnited Kingdom and Finland (Wal-

terskirchen, 2004). The use of newtechnologies and, as a consequence,the growth of certain economic sec-

Table 5

Sector-Specific State Aid from 1989 to 2002

Present value

19892002 19892002 19891995 19962002

Branche EUR million Share in %

55 Hotels and restaurants 383 8.0 10.3 5.824 Chemicals and chemical products 377 7.8 9.4 6.429 Machinery and equipment n.e.c. 340 7.1 7.9 6.334 Motor vehicles, trailers and semi-trailers 317 6.6 8.4 4.932 Radio, television and communication equipment

and apparatus 295 6.1 5.5 6.728 Fabricated metal products, except machiner y and equipment 282 5.9 5.2 6.620 Wood and products of wood and cork 247 5.1 4.1 6.226 Other nonmetallic mineral products 212 4.4 4.9 3.927 Basic metals 201 4.2 4.7 3.773 Research and development services 201 4.2 2.1 6.23 3 Medical, precisi on and optical instr uments , watches and c locks 174 3.6 3.4 3 .715 Food products and beverages 161 3.3 2.5 4.040 Electricity, gas, steam and hot water supply 158 3.3 3.6 3.125 Rubber and plastic products 154 3.2 2.6 3.821 Pulp, paper and paper products 135 2.8 3.1 2.531 Electrical machinery and apparatus n.e.c. 114 2.4 2.4 2.472 Computer and related services 108 2.2 1.4 3.145 Construction 103 2.1 2.0 2.322 Publishing, printing and reproduction of recorded media 90 1.9 2.3 1.551 52 Wholesale trade and commission trade services 88 1.8 2.0 1.617 Textiles 80 1.7 1.8 1.574 Other business services 72 1.5 1.0 1.960 Land transpor t and transpor t via pipeline services 68 1.4 1.6 1.290 Sewage and refuse disposal services 56 1.2 1.4 1.036 Furniture; manufacturing n.e.c. 53 1.1 1.3 0.970 Real estate services 50 1.0 0.0 2.0

35 Other transport equipment 37 0.8 0.6 0.950 Sale, maintenance, repair of motor vehicles and motorcycles 34 0.7 0.7 0.793 Other services 23 0.5 0.6 0.437 Recycling 17 0.4 0.2 0.4Total 4,810 x x x

Source: Finkord data base, Federal Chancellery.




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tors, entail a rising demand for ade-

quately qualified workers, as we haveseen from the diffusion of the newinformation and communication tech-nologies (Falk, 2004). A lack of highlyqualified workers in these areas im-plies that in Austria sectoral specializa-tion will remain limited to mediumtechnology industries (chapter 3).

2.2.5 Sectoral Regulation: Significant

Progress in Recent Years

Triggered by the liberalization of thetelecommunications industry and,subsequently, other network indus-tries, sector regulation has changedsignificantly over the past few years.

According to calculations by theAustrian Institute of Economic Re-search (WIFO), deregulation signifi-cantly dampened electricity pricesfor corporate customers (by 35%)and for households (by 13%). By in-

ternational standards, this declinewas more pronounced than in compa-rable EU countries. The liberalizationof the natural gas market in October2002 also led to substantial falls in pri-ces. In addition, liberalization in thetelecommunications sector increasedthe market share of alternative provid-ers at the expense of (formerly) state-owned providers.

This process of liberalization took

place in all EU countries, however;thus, it may not have impacted se-verely on sectoral specialization, ex-cept in cases where it promptedlarge-scale concentration. In somenorthern European countries like Ire-land, Finland and to a lesser degree

in Sweden, the information andcommunication technology industryexpanded at an above-average rate(e.g. Nokia, Ericsson).

The crisis that hit the Austrian na-

tionalized industries in the 1980scaused government influence in theseindustries to become even bigger andprompted a host of labor market pol-icy measures for the workers con-cerned (e.g. the introduction of a re-employment scheme for steel work-ers, the so-called steel foundation).More recently, new forms of employ-ment (contract self-employment,marginal employment, contract em-

ployment, new self-employed) haveemerged that have provided somepositive employment impetus in cer-tain sectors (e.g. in the retail trade).Finally, the admission of seasonalworkers in agriculture and tourismhas driven up temporary employmentof foreigners from 1997 on; since2002, businesses in all sectors are per-mitted to employ seasonal workers.

Hall and Soskice (2001) describe

the possible interaction between sec-toral specialization and regulation inlabor, product and financial markets.The regulation of uncoordinated mar-ket economies (e.g. the U.S.A. or theUnited Kingdom) facilitates radicalinnovation, whereas regulation incoordinated market economies (e.g.Germany or Austria) support

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