Austria

AUSTRIA, with its well-developed market, is closely tied to other EU economies, especially Germany. Having outpaced the euro area’s biggest economy for most of the past 15 years, the Alpine republic is now lagging behind Germany, also its most important export market.

Austria was the second-wealthiest country in the EU in 2012, but had fallen to sixth place by 2014. The economy grew by less than 1pc in 2015. Its economic activity maintained momentum in the first quarter of 2016 and expanded 0.4pc over the previous quarter.

Domestic demand, and private consumption in particular, driven by the tax reform, will continue to provide the necessary support in the forthcoming quarters of 2016, although the forecast risks have increased with the stronger global headwinds.

The following year is also likely to see GDP growth of no more than 1.5pc. There are currently no signs of more dynamic growth in 2017. The positive effect of the tax reform for consumption will weaken in 2017. The FocusEconomics Group panelists see the economy expanding 1.3pc in 2016. For 2017, the panel forecasts broadly-steady growth of 1.5pc.

A survey by the Austrian Institute of Economic Research (WIFO) indicates a stable economic climate. Last year, quarterly growth improved drastically on a year-on-year basis from the second-quarter onwards, supported in particular by the upturn of investment, private consumption and foreign trade. In the fourth-quarter, the contribution from public consumption was particularly strong due to the spending on refugees.

According to the IMF, Austria has weathered the global financial crisis well, and output and employment have recovered to pre-crisis levels. The budget deficit has been well contained in recent years.

Nevertheless, budget support for bank restructuring and resolution has ratcheted up public debt, which stands now at about 86pc of GDP. In 2016, the Fund projects that growth accelerated to 1.4pc from 0.7pc estimated last year.

While the pick-up in growth would support continuing employment expansion, unemployment would still rise to 6.5pc by 2017, elevated by higher migration-related labour supply.

Historically, Austria has always received a sizeable number of immigrants. The unrest in the Middle East, however, has propelled the estimated number of asylum seekers in 2015 to an exceptional 90,000, or about 1pc of Austria’s population.

While the influx of refugees is posing numerous challenges, their successful integration can help reignite potential growth and eventually reduce fiscal imbalances.

Austria’s public finances are strained by burdens from the banking system and one of the lowest retirement ages in the region. The 2015 budget deficit was significantly below official forecasts and amounted to only 1.2pc of GDP thanks to the favourable trend in revenue. Slight rise is expected for 2016.

Public debt increased to over 13bn euros or 86.2pc of GDP in 2015. In 2016, the budget deficit is expected to rise to 1.7pc of GDP in 2016 while public debt as a percentage of GDP will probably fall slightly.

Finland

FINLAND is stuck in a state of economic paralysis. Its GDP grew for years at a clip that outstripped the eurozone average but will fail to keep pace with those of other eurozone countries in the coming years, according to an economic forecast published by the Bank of Finland.

Any growth is expected to be fuelled primarily by private consumption which has been weak since the onset of the financial crisis.

According to the most recent forecast by the European Commission,the country’s GDP growth is expected to remain among the slowest in the euro area in the coming years. Finland is already lagging well behind the Eurozone economies that were in dire straits three years ago.

After three years of contraction, Finland’s economy returned to slow growth last year on the back of rising private consumption and exports. Modest growth continued in the 2016 first-quarter with economic activity expanding mildly in January and February. Nevertheless, many of the economic constraints of recent years still persist.

The Finnish Finance Ministry has projected that the GDP will grow by 0.9pc in 2016. The growth for 2017 and 2018 will be 1.2pc. Despite the signs of recovery, the growth is expected to remain quite fragile.

The pace of debt accumulation is a matter for concern, as Finland’s longer-term growth outlook is weak, on account of the prolonged recession, contraction in the working-age population and the ongoing restructuring of Finnish industry.

The Governor of the Bank of Finland believes structural reforms and measures to improve the competitiveness of businesses are key to revitalising the economy. There are also concerns about the country’s debt trajectory. The public debt is projected to creep up to over 68pc of GDP in 2017 as the government has long operated on a deficit.

According to the preliminary data reported by Statistics Finland to Eurostat, the financial position of the government was in deficit for the seventh successive year in 2015 at 2.7pc of GDP, but below the 3pc reference value of the European Union’s Stability and Growth Pact.

According to the latest forecast of the Ministry of Finance, in 2016 the deficit will probably stay below the threshold again. But the government’s debt-to-GDP ratio is set to rise to 66.6pc in 2017, up from an estimated 64.9pc in 2016.

The central government debt was slightly under 100bn euros at the end of 2015, below 50pc of GDP. Earlier, the government adjustment measures have helped to curb but not halt the growth of the public debt. The public debt stood at 63.1pc of GDP at the end of 2015.

Boosting employment is a key issue. The government hopes to raise the employment rate from 68pc to 72pc by removing incentive traps and expanding the active use of unemployment benefits.

Published in Dawn, Business & Finance weekly, May 23rd, 2016