Vote of confidence in conservative policies

EcoPerspectives // 4 quarter 2019  
Vote of confidence in conservative policies  
After its electoral success in late September, the conservative party (ÖVP) is expected to form a new government. To obtain a  
majority, the party could turn again to the FPÖ (far right). In that case, policies should remain largely unchanged and focus on fiscal  
consolidation and the reduction of the tax burden. The next government will face a less favourable economic environment. GDP  
growth could decelerate to around 1.2% in 2020. Nevertheless, public finances have improved considerably, giving the government  
sufficient leeway to fight a recession, if necessary.  
The conservatives have won the election  
1- Growth and inflation  
The conservative party ÖVP of former Chancellor Sebastian Kurz  
clearly won the general election on 29 September. The party  
obtained 37.5% of the vote. To obtain a majority, Mr. Kurz has to  
look for a partner. A coalition with the Greens, which obtained their  
best score on record (13.8%) would look like an ill-assorted couple.  
The compromises it requires might be hard to swallow. Mr Kurz will  
not be tempted to revive the so-called grand coalition with the SPÖ  
GDP Growth (%)  
Inflation (%)  
social-democrats). For its part, the SPÖ might not be so keen to  
join as it lost a significant part of its support: around 21.2% against  
6.9% in the 2017 election. This leaves a coalition with the FPÖ  
extreme right), weakened by scandals to 16.2% of the vote  
compared to 26% in the 2017 general election. The advantage of a  
continuation of a coalition with a much smaller FPÖ is that Mr Kurz  
could continue the old coalition programme centred on budget  
consolidation and the reduction of the tax burden, and obtain more  
ministers of his own party in the new government.  
Source: National Accounts, BNP Paribas  
Consumption growth should remain at around the same level as in  
018. In the coming years, even though disposable income is set to  
slow, consumption could remain rather dynamic, as households  
may be dipping into their savings.  
Healthy financial positions to confront the challenges  
Any new government will be confronted with less favourable  
conditions than the first Kurz coalition. Whereas annual growth  
peaked at 2.7% in 2018, it is expected to slow to 1.4% in 2019 and  
Against this backdrop, labour market conditions are expected to  
remain very tight, and tensions may even rise further due to the  
retirement of the baby-boom generation. Immigration is likely to  
remain an important factor to overcome labour shortages. Wage  
settlements should remain generous, which will partly spill over in  
domestic prices, in particular for services. Inflation is expected to  
remain around 1.7% and core inflation could inch up to 2% in 2020  
compared with 1.8% in 2018.  
1.2% in 2020. This still looks quite favourable compared to other  
eurozone countries. The main reason for the growth deceleration is  
the slowdown in global trade. It has resulted in weaker demand from  
the eurozone, in particular from Germany and Italy, which account  
for almost 40% of Austrian exports. Manufacturers do not expect a  
quick improvement in the outlook. In our scenario, we expect  
production to only gradually recover in 2020.  
Public finances have improved considerably. Public debt has  
declined to 71% of GDP from 83% in 2010 and the budget shows a  
slight surplus. This would provide the government with substantial  
leeway to fight recession if necessary.  
In addition investment is slowing after having substantially increased  
in the past three years. In 2018, the investment ratio amounted to  
23.9% of GDP, one of highest in the euro area. Because of the  
weakening of cyclical conditions and growing uncertainty, business  
investment has been slowing. In the building sector, housing permits  
have been losing momentum. These lead construction activity by  
about two years.  
By contrast, private consumption should remain very dynamic  
underpinned by strong growth in household disposable income  
supported by a substantial increase in collective wages (2.9%  
against 2.6% in 2018) and some tax measures such as the  
introduction of the family bonus.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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