On Weak Growth and Higher Inflation in Austria

The weak growth of the Austrian economy ever since the euro-zone crisis is not caused by any lower price competitiveness. As is demonstrated by an analysis of the effective exchange rate, unit labour costs and the inflation gap vis-à-vis Germany and the euro-zone average, competitiveness has not changed much since 2012. Rather, the link between below-average growth and above-average inflation is due to the burden imposed on real incomes from the rapid increase in labour supply and unemployment and the resulting weakening of domestic demand. The inflation gap vis-à-vis Germany and the euro zone is caused primarily by a boom in tourism demand and consequent price increases.