Recent Study: Austria Business Forecast Report Q1 2014

The centre-left Social Democratic Party of Austria (SPO) and centreright Austrian People's Party are set to once again form a 'grand coalition' government under the chancellorship of SPO leader Werner Faymann. This will ensure broad policy continuity. It also will soothe market fears linked to the possibility of a right-wing coalition and the concomitant austerity measures.

The Austrian economy is set to remain on a slow but steady real GDP growth trajectory over the course of 2014 and into 2015, and we forecast an expansion of 1.5% in 2014 and 1.9% in 2015. This growth will primarily be supported by rising private consumption, bolstered by an improvement in consumer confidence, low inflation and an uptick in domestic credit provision.

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N ationalised lender Hypo Alpe Adria is likely to require additional capital injections in 2014, with local media estimating the requirement at EUR5.3bn. This is likely to hamper the finance ministry's commitment to eliminating the government's budget deficit by 2016. We forecast a budget deficit equating to 2.2% of GDP in 2014 and 1.9% in 2015.

Austria's current account surplus is set to widen in 2014 to 2.9% of GDP on the back of increased exports to eurozone peers, notably Germany, as well as economic recovery in Central and Eastern Europe, where import demand has been slack over the past few years.

Major Forecast Changes

We have revised up our forecast for Austria's fiscal deficit in 2014 and 2015, from 1.9% and 1.4% of GDP to 2.2% and 1.9% respectively. State-owned bank Hypo Alpe Adria's request for additional capital injections in order to avoid breaching minimum capital requirements will deal a blow to government finances.

Key Risks To Outlook

If the People's Party follows through with its threat to walk away from coalition talks with the SPO, it would very likely result in a rightwing coalition government led by the People's Party that advocates harsher austerity measures and tighter immigration controls. While in the long term this would ensure that the budget deficit is brought down towards the zero target level, it may result in Austria being ostracised in the diplomatic community, as was seen the last time the nationalist Freedom Party of Austria entered into coalition in 1999.

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