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09.05.2016

2015 federal province analysis of Bank Austria Economics Department:
Improved foreign and domestic demand helps economic recovery in Austrian provinces, despite growing uncertainties

  • Brighter economic environment boosts growth in most Austrian provinces in 2015
  • Upper Austria takes top provincial spot in 2015, followed by Vorarlberg and Tyrol
  • Industry revival injects crucial impetus for Upper Austria, Vorarlberg and Burgenland
  • Sluggish construction activity drags almost every province down
  • Services the main driving force in 2015 – especially in Salzburg, Carinthia and Lower Austria
  • All provinces could boost their growth rates in 2016: tax reform and stable global conditions bring balanced growth opportunities for industrial provinces and services strongholds
  • Unemployment continues to rise: better economic activity curbs momentum in the west; east affected more strongly by increase in labour supply
  • Migration leads partly to displacement, but can help counter labour shortages

Following a gain of 0.4 percent in 2014, economic growth throughout Austria rose to 0.9 percent in 2015. The stronger increase in economic output is attributable to improved foreign and domestic demand alike. On the one hand, the continued recovery in Europe – including Central and Eastern European countries – as well as the solid growth trend in the USA, supported by the weaker euro, resulted in a moderate revival in exports despite certain problems, such as the weaker economic activity in some emerging countries or the negative consequences of the oil price decline on some commodity countries, like Russia for example. On the other hand, the modest upturn in the Austrian economy in 2015 was helped along by more backing from domestic demand. A somewhat better outlook contributed to somewhat stronger investment activity, while the low inflation brought on by the decline in commodity prices had a positive influence on consumption. “The majority of Austrian provinces managed to use the encouraging situation in 2015 to generate at least slightly higher economic growth. Additionally, the balanced development of the individual growth components resulted in lower growth differences between the federal provinces than in the year before”, revealed Bank Austria chief economist Stefan Bruckbauer.

Upper Austria back to top of growth ranking in 2015
The general conditions in 2015 put the industrial provinces with a stronger export focus at a slight advantage compared to those traditionally strong in services. “In 2015 Upper Austria overtook Burgenland as the faster grower – with an estimated economic output figure of 1.4 percent it took top spot in the Austrian growth ranking. The next two provinces in the list are Vorarlberg and Tyrol, which also managed to benefit from good industrial development”, said Bruckbauer. Thanks to robust support from the services sector, the growth difference between the less industrial provinces like Vienna, Salzburg and Carinthia and the fastest growing ones was kept within reasonable limits. While traditionally an industrial region, Styria brought up the rear in the federal province ranking; its current sector focus and non-recurring factors prevented it from exploiting the export-driven tailwind, leaving it bordering on stagnation.

Recovery in Europe boosts industry, emerging markets under pressure
The recovery in industrial countries and the stronger domestic demand injected momentum into Austrian industry in 2015. At almost 2 percent in real terms, production expanded more strongly than in the previous year, and more sectors managed to deliver better results. Above-average development was achieved primarily in metals production, mechanical engineering, pharmaceuticals, wood processing and the manufacture of electronic and optical equipment. By contrast, oil refining and the chemical industry along with the glass industry and other vehicle manufacturing suffered setbacks. “Despite accounting for just over 20 percent of value added, Austrian industry provided roughly one third of total economic growth in 2015. A favourable regional export focus coupled with a suitable sector structure in Upper Austria, Vorarlberg and Burgenland ensured that industry provided above-average support for economic development under the prevailing circumstances”, analysed Stefan Bruckbauer. Industry was even the main driver of growth in these three federal provinces. In Styria, Salzburg and Carinthia, by contrast, the sector curbed regional economic development.

Construction noticeably supports growth only in three federal provinces
The Austrian construction industry, however, was very sluggish in 2015 once again. Gross value added stagnated by annual comparison since there was little impetus especially from civil engineering on account of tight public budgets. Only in the three federal provinces of Tyrol, Vorarlberg and Upper Austria did construction really benefit overall growth. By contrast, developments in construction clearly hindered economic growth in Burgenland and Vienna, and at least to some extent in Carinthia and Salzburg.

Greater momentum in services sector
After the weak upwards trend in 2014 the services sector expanded much more strongly in 2015. Gross value added increased by 0.9 percent in real terms across Austria. Since the sector accounts for almost 70 percent of total value added in Austria, it was also easily the largest driver of growth throughout the entire economy. All told, services accounted for two-thirds of economic growth in Austria on average. Trade was a major factor behind the upswing in the services sector. Value added from tourism also grew more strongly in 2015. Additional momentum was generated by real estate as well as health-care, social services and a broader range of education services, through more child nursery places for example. Services contributed to economic growth in all Austrian federal provinces in 2015. The services sector was particularly influential in Salzburg, but also in Vienna, Carinthia and Lower Austria. The contribution made to growth by the tertiary sector was low in the industrial stronghold of Upper Austria, and in Styria, though it was the only supporting factor here.

Somewhat more momentum expected for all federal provinces in 2016
Driven primarily by an expanding domestic economy, Austrian economic growth in 2016 is likely to rise from 0.9 percent to 1.5 percent. On the one hand, investment activity is likely to pick up pace somewhat, while on the other hand, consumption in particular will likely trigger some tangible stimulus in 2016 thanks to the tax reform. Amidst an unchanged global environment with sound growth prospects for Austria’s key trading partners – helped along to some extent by the still undervalued euro and the low commodity prices – the economists at Bank Austria believe all federal provinces will be able to achieve economic growth that is at least slightly higher than in 2015. “While the growth stimuli from external demand – which mainly affect the strong industrialised countries – will remain largely unchanged, the tax reform will enhance the positive impacts on the services sector. What is more, the construction industry should also pick up a little in 2016”, said Bruckbauer in anticipation. The growth opportunities for the stronger industrial provinces and the services strongholds are quite balanced for 2016, so the growth differences between the federal provinces will likely be very small. “Upper Austria will be able to defend its leading position in 2016, but the gap to the other federal provinces will narrow”, said Bruckbauer, before adding: “We expect the most significant improvements compared to the previous year will be in Styria, Carinthia and Vienna, which means the difference between the country with the highest estimated growth rate in 2016, Upper Austria (1.8 percent), and the lowest – Burgenland we believe – is only likely to be 0.4 percentage points.”

Economy explains only some of the regional labour market differences
The upturn in the economy in 2015 was too weak to ease the situation on the labour market. “In spite of employment growth, the jobless rate rose in all federal provinces in 2015. The robustness of the increase depends mainly on the differing trends in labour supply. Better regional activity, as seen in the western provinces for example, could curb the upswing there somewhat, but not prevent it”, summed up Bank Austria economist Walter Pudschedl.

Labour supply in Austria has grown by almost 8 percent in the last five years because of population growth and stronger migration, especially since the opening up of the labour market to new EU countries in 2011. The highest growth – caused primarily by migration – was recorded in the eastern provinces of Vienna (+10.5 percent) and Burgenland (+9.9 percent). The labour supply over the same period in the western provinces of Tyrol and Vorarlberg rose at an above-average rate, yet was influenced comparatively more by the growing domestic working population. That said, in these two federal provinces where the highest economic growth and high employment growth were recorded, the rate of unemployment was constant (Vorarlberg) or rose modestly (Tyrol). Good economic development in itself is not enough though: in Burgenland, which has been one of the strongest growing provinces in the last five years and produced the second strongest employment growth at more than 8 percent, the number of those unemployed increased by more than 30 percent. With a figure of almost 70 percent the increase in unemployment is highest in Vienna because alongside a below-average growth and employment performance, Vienna also exhibits the fastest rise in labour supply. If the Vienna economy had performed as well as Vorarlberg (the best regional economic development since 2010), the sharp rise in the labour supply would have meant the jobless rate in Vienna rising from 8.8 percent in 2010 to 10.5 percent in 2015, and therefore well under the actual figure of 13.5 percent.

The figures show that there are regions and sectors where a stronger rise in unemployment is accompanied by a stronger rise in migration (in trade, temporary work, cleaning services and particularly in Vienna). Other sectors and regions, such as tourism in the west, reveal no increase in unemployment, despite strong immigration. Unemployment tends to be stronger among foreigners than Austrians because of immigration, and their origin plays a significant role here. The rise in the foreign unemployed from economically weak countries is much stronger than for those from OECD countries. “Clearly, immigration in Austria causes displacement and overcomes labour shortages, depending on the region and the sector in question”, said Pudschedl.

The stability trend on the labour market as seen in the early months of 2016 will not last, according to Bank Austria’s economists, and unemployment will continue to increase in all federal provinces throughout the year. “In view of the fairly balanced economic expectations, the scale of the increase in unemployment rates in the individual federal provinces will be shaped almost exclusively by labour supply trends in 2016. While we expect an increase from 9.1 to 9.5 percent for Austria as a whole, the figures will range from just over 6 percent in the western provinces to over 14 percent in Vienna”, expects Pudschedl.

Enquiries: Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel. +43 (0) 50505 - 41957;
E-mail: walter.pudschedl@unicreditgroup.at