Now Available: Austria Business Forecast Report Q4 2013

The Austrian government is set to continue its policy of attempting to eliminate the federal budget deficit by 2016 regardless of which party emerges victorious from the September 29 general election.

We forecast the budget deficit to fall to 2.1% of GDP in 2013 and 1.9% in 2014, from 2.5% in 2012. An increase in tax revenues is set to be the primary driver behind this reduction, as well as an austerity drive in the country's provinces to eliminate their respective deficits.

Real GDP growth its set to increase from its 2012 level of 0.8% to 0.7% in 2013, rising further to 1.5% in 2014. The primary driver behind this growth is set to be net exports, bolstered by a robust pharmaceuticals sector, as well as the manufacturing sector's important role in the supply chain for German autos makers.

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The winding down of nationalised lender Hypo Alpe Adria is set to be completed by end-2013, after the European Union's anti-trust authorities approved the government's plans in September. While the stricken bank may require additional state aid to enable the sale of its Balkan unit and the winding down of its Italian unit, the move bodes well for the government's medium-to long-term fiscal position, as well as the health of the banking system.

Key Risks To Outlook

In spite of the progress made towards the winding down of Hypo Alpe Adria, the Austrian banking sector remains on unstable footing. The sector remains highly exposed to economies in Central and Eastern Europe (CEE) and South Eastern Europe (SEE), as well as Italy.

If there is not a more concerted effort on the part of the banking sector to reduce its exposure to high-risk markets such as Hungary and Ukraine it could lead to a sharp uptick in non-performing loans (NPL). Although the CEE economies are set to fare better in H213 and 2014, the policy environment remains uncertain and NPLs are still high compared to domestic Austrian levels. Deterioration in the health of any of the large Austrian banks could severely impact private consumption, as credit extension dries up, posing a substantial risk to our stable growth outlook.

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