Centrope Business And Labour Report 2007

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CENTROPE is a multilateral project which develops a binding and lasting cooperation framework for the collaboration of regions and municipalities, business enterprises and societal institutions in the Central European Region. Thus it covers the regions Vienna, Lower Austria and Burgenland, South Moravia Region, Bratislava and Trnava Regions, Györ-Moson-Sopron as well as Vas County.

The CENTROPE Business and Labour Report is joint project of WIFO Vienna, wiiw Vienna, Institute for Economic Research of Slovak Academy of Sciences, IREAS – Institute for STructural Policy Prague, West Hungarian Research Institute Györ.

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Centrope Business And Labour Report 2007

  1. 1. CENTROPE BUSINESS & LABOUR REPORT Study carried out by In co-operation with Institute for Structural Policy (IREAS), Czech Republic, The West Hungarian Research Institute, Hungary The Slovak Academy of Sciences; Slovakia
  2. 2. CENTROPE Business and Labour Report, No. 0, 2007 2 Executive Summary The CENTROPE region is one of the most important transnational economic areas at the former Eastern borders of the European Union. Located at the intersection of four countries, comprising two capital cities as well as several further major cities (Brno and Győr) and covering some of the most dynamic regions in the Central and East European countries as well as some of the most prosperous regions within the EU (Vienna), CENTROPE is a region of enormous economic potential. Situated at the crossroads of important European transport corridors and disposing of efficient international airports, CENTROPE offers excellent accessibility and short distances to all European key markets. Given its large and expanding market together with its favourable location and high accessibility, CENTROPE is one of the European key areas for both large and small to medium scale investment. The high number of institutions of research and development and higher education in CENTROPE add to this, and are a key factor to attract highly innovative industries and services, which in turn are the basis for a sustained period of economic growth and prosperity. The economic ties and cross-border activities within CENTROPE have increased significantly over the last decade and a half. It can be expected that these ties will strengthen further in the near future, as the planned measures to close existing gaps and eliminate bottlenecks in the cross-border transport network as well as to step up the modernisation of the existing infrastructure will improve internal and external accessibility. However on the institutional front the still existing institutional and physical barriers, e.g. in the fields of labour mobility and transport infrastructure (especially with respect to the Austrian regions of CENTROPE), hamper the full exploitation of the economic potential of CENTROPE. Thus, one consequence of the increasing economic integration of the regions forming CENTROPE, is a necessary parallel evolution of cross-border policy making. In consequence, to facilitate economic cooperation, cooperation in the fields of economic policy is a must. In the end, a successful development of CENTROPE depends crucially on the integration of policy makers, with respect to sharing similar goals and as a consequence also the same decisions. The broad aim of the CENTROPE “Business and Labour Report” is to base these decisions on accurate, comparable and timely analysis of the economic development of CENTROPE and its regions. As such this report intends to assist all the relevant actors (e.g. economic agencies, networks of entrepreneurs, trade unions, politicians and administration) in monitoring the economic development of the transnational economic space. Additionally this report intends also to serve as a basis for discussion of labour market and employment issues and policies, as well as of investment and location policies, to make CENTROPE an attractive region for local and foreign investors. Importantly, it must not be forgotten that this first issue of the CENTROPE “Business and Labour Report” is a pilot project. This implies that beyond writing this report, much effort from all participating institutions was spent in making this report feasible at all. Thus, before actually drafting the report a lot of background work had to be done. In detail this means that the current report is the results of an intensive work programme that included four work packages. The first work package was concerned with setting up a multilateral working group. Therefore, to gain as detailed as possible knowledge of the individual regions within CENTROPE the aim was to find one competent partner from each CENTROPE country. Each partner, given his experience and knowledge of local regional development had at least three tasks to fulfil, namely to act as a contact person for any questions concerning his region/country, to gain access to the relevant statistical data and to write
  3. 3. CENTROPE Business and Labour Report, No. 0, 2007 3 the report for his country. Thus, a multilateral working group was established. The partners in the group consist of the Austrian Institute of Economic Research (WIFO) and the Vienna Institute for International Economic Studies (wiiw) from Austria, Institute for Structural Policy (IREAS) of the Czech Republic, the West Hungarian Research Institute from Hungary and the Slovak Academy of Sciences. The second work package centred around finding an appropriate set of contents for the pilot CENTROPE “Business and Labour Report”. At this stage all partners worked together, to establish a common set of topics that realistically could be covered, given the differences of data availability across countries. The third work package dealt with data and methodological issues. A main aspect in this package was to create one basic set of indicators that are common and comparable across the CENTROPE countries, in order to ensure that in its essential results the “Business and Labour Report” is homogenous. Besides this common data set, it was decided that each partner should if possible use any available additional data, which might not be comparable to data from other countries, to deepen the analysis and interpretation in the report. Finally the fourth work package consisted of drafting and writing this proto-type version of the CENTROPE “Business and Labour Report”. In a sense this first version of the CENTROPE “Business and Labour Report” is symbolic for the character of CENTROPE. On the one hand, five institutions of CENTROPE were gathered together, and every participating institution was highly ambitious to jointly work on this report, in order to make it valuable source of information. Thus several different parties worked to together on a worthwhile project, which is also what CENTROPE in toto is about. At the same time the joint work has not been without difficulties. Different methodologies and experiences of the partner institutions, and even more the heterogeneity of available data sources, made it difficult to present this report and the chapters therein in a homogeneous way. This is reflected in the different styles the individual chapters in this report are written. It is also reflected in the fact that the country chapters focus on a small, though important, set of indicators, namely income, output and employment, while a number of important other indicators had do be discarded as they were not available in the course of this project. Thus important variables like wages (on a sectoral level), prices, foreign trade etc. were disregarded. Though the feeling among the participating institutions was that these indicators should and -in principle- could be used, the acquisition of such data was beyond the scope of this project. The end result of this endeavour is the current CENTROPE “Business and Labour Report” which represents a first time concise description of the economic development of CENTROPE, and thus provides a significant value added. But also the problems that arose in the course of the project provide important information, as they show the tasks for future work in order to make this report an even more valuable project. This is another aspect in which CENTROPE “Business and Labour Report” reflects CENTROPE idea and project: To work open-minded and jointly on the existing problems, in order to make this report and the whole CENTROPE better ever time. Macroeconomic developments of the CENTROPE countries During the last few years the CENTROPE countries were marked with strong economic growth, in terms of income, industrial output and exports, and recently also in employment. Though GDP growth rates will be somewhat lower in 2008, especially for Hungary, the CENTROPE countries will grow at a respectable pace – compared to the EU-27. Exports from the CENTROPE countries are expected to grow further, given the favourable international environment, the growing import demand of the
  4. 4. CENTROPE Business and Labour Report, No. 0, 2007 4 region’s main trading partner countries, as well as the continuing competitiveness of the three new member states within CENTROPE. Limitations for economic growth in the CENTROPE countries potentially come from the increasingly tight labour markets, where the lack of highly skilled labour might dampen the future development of high value added activities. Still, the outlook for the CENTROPE regions is optimistic. It becomes even more optimistic, if the substantial funding from the European Cohesion Policy is taken into account. From 2007 onwards the countries in Central and Eastern Europe will receive on a net basis around +2.5 to +4% of their GDP. The importance of these funds is illustrated by the fact that from 1948 to 1952 Western Europe received in the course of the „European Recovery Programs“ (Marshall Plan) financial assistance from the USA, which was on average 2.1% per year of the ERP countries GDP. The optimistic outlook for the CENTROPE countries is good news for the individual CENTROPE regions within these countries. Given the high correlation between country growth and the economic development of its regions it can be expected that the regions will be able to enjoy economic prosperity just as much as the countries as a whole. This is especially true for the CENTROPE regions. With few exceptions the CENTROPE regions belong to the most prosperous and most dynamic regions within their countries. Hence, given the past development of these regions, as well as their economic structure it can be expected that the CENTROPE regions will not only benefit from the good macroeconomic development in their country, but to also be a major contributor to the economic growth in the CENTROPE countries. The Economic Situation of the CENTROPE Region Despite these favourable conditions CENTROPE is located in neither the economic nor the geographic centre of Europe. Rather it is a region that lies at the intersection between the European Economic centres, which are located to the West of the region, and the less developed but rapidly growing centres of Eastern Europe. Thus CENTROPE is a “transitory” region, in which good accessibility from the economic centres of Western Europe and from the rapidly growing Eastern European countries shape comparative advantages. These – as is documented by a number of recent spectacular foreign direct investments – in general lie in a strong industrial base in particular in ancilliary industries (such as automotive components), a strong orientation on medium skill and niche products and in particular in the Eastern part of CENTROPE rapid technological catching up and low wage costs. Similarly the CENTROPE region is still less integrated relative to regions within one country. Economic ties and cross-border activities within CENTROPE have increased significantly over the last one and a half decades. According to recent surveys, around a quarter of the firms located in the region holds cross-border relationships (in the form of ownership, delivery relationships and/or other forms of co- operation). Yet, cross-border exchange in particular in the labour market still remains limited due to existing institutional impediments and bottlenecks in infrastructure. It can, however, be expected that these ties, too, will further strengthen in the near future, as the planned measures to close existing gaps and to eliminate bottlenecks in the cross-border transport networks as well as plans to step up the modernisation of the existing infrastructure will improve internal and external accessibility. Furthermore, on the institutional front the still existing institutional and physical barriers, e.g. in the fields of labour mobility, which hamper the full exploitation of the economic potential of CENTROPE, can be expected to be removed within the next years. Despite these common features, CENTROPE is by no means a homogenous region. This comes as no surprise. Covering a territory of more than 44.000 square kilometres and a population of almost 6.5
  5. 5. CENTROPE Business and Labour Report, No. 0, 2007 5 million inhabitants, the region is similar in size to many medium sized or smaller countries of the EU. Thus substantial internal disparities exist. These disparities can be structured along two dimensions. First, there are significant differences between those regions of CENTROPE located in different countries and second there are substantial differences between the cities, their environs and more rural areas. Although in many respects the economic development of the region is closely linked to the economies of the "twin-capitals" of Vienna and Bratislava and the large agglomerations of Brno and Győr, CENTROPE is not a typical central region in the European context. Its settlement structure on average is not dominated by large cities. Rather – as in most parts of Central Europe – medium-sized towns dominate. At the same time CENTROPE neither is a peripheral region. Only some parts of CENTROPE (such as for instance Southern Burgenland, the Waldviertel in Lower Austria and parts of Southern Moravia and Vas County) may be considered rural peripheries. Thus the best characterisation of CENTROPE is that of a region characterised by strong centres located at the intersection of two economically very different types of territories of the EU. Due to the legacies of the communist regimes the main dividing line within the region was and still is the division between the new member states and Austria: While in the Austrian parts per capita GDP approaches or exceeds the EU average, all of the CENTROPE-regions in the new member states – except for Bratislava region – currently qualify for EU funding under “Objective 1” supporting the catch- up progress of structurally week regions; their GDP per capita is much below the EU-25 average. In the richest region of CENTROPE (Vienna) GDP per capita at purchasing power parity was at 172.3% of the EU-25-average, while in the poorest region (Trnava) it was at 55.8% of the average. However, not all differences in CENTROPE follow purely national lines. For instance the capital city of Bratislava can claim a per-capita-GDP that is comparable to the Austrian regions and is above the EU- average; together with its “twin city”, Vienna, Bratislava is one of the economic strongholds of CENTROPE. Burgenland, on the other hand, has been an “Objective 1” region until recently; its GDP per capita is not only below the EU-average but also below the CENTROPE average. While the new member states’ regions in general may be considered “poorer” than the Austrian regions, they are also considerably more dynamic. Since 1995 GDP growth rates in the new member states regions of CENTROPE ranged between 7% and 12% and clearly outperformed the Austrian regions (with growth rates of 3% to 4%). The rapid catch-up process of the Central and Eastern European countries thus makes the whole CENTROPE region more dynamic than the European average. Similarly, the structure of the labour force and infrastructure endowments differ significantly across regions. Aside from national differences, disparities in education systems are also closely associated with urbanisation: In general CENTROPE is characterised by a highly qualified workforce that has its strongholds in the secondary and upper secondary education levels. In particular in the regions of the Czech Republic and Slovakia around 80% of the employed have a completed secondary education. The share of population with a tertiary education is, however, below the European average in all regions except the capital cities of Vienna and Bratislava, where around a quarter of the workforce has a completed tertiary education. High shares of the workforce with only a completed primary education can only be found in Western Transdanubia. Infrastructure endowments, accessibility and innovation indicators tend to follow these patterns. In particular, indicators of research & development activity (such as R&D expenditures, patents per 1000 inhabitants) and infrastructure quality are clearly above the EU averages for the large agglomerations (in particular Vienna and Bratislava), but not for the more peripheral region.
  6. 6. CENTROPE Business and Labour Report, No. 0, 2007 6 Finally, the employment structure of the region differs between the Austrian and the new member states’ regions. In the new member states’ CENTROPE regions a significantly larger share of the employees (29.5% relative to 16.4% in the Austrian regions) works in manufacturing and a smaller share works in services. (In particular employment in public services is around 5 percentage points lower in the new member states regions' than in the Austrian part of CENTROPE.) As with aggregate GDP, however, the new member states regions are also the more dynamic regions in terms of structural change. For instance, indicators of structural change at a high level of sectoral aggregation suggest that the new member states' regions in CENTROPE are also converging in structure to the Austrian regions and have experienced a structural change that was almost twice as high as in the Austrian regions. The Labour Market Situation in the CENTROPE Region Considering the labour market, in a European context the CENTROPE region is a region with relatively low unemployment rates and a labour market participation that is equal or slightly higher than the EU average. Labour market disparities within the region seem to be less influenced by national borders than other indicators of economic development. Only one region in CENTROPE (Trnava) was characterised by double digit unemployment rates according to EU Regio data in the year 2005. Vienna and South Moravia had unemployment rates of 9.1% and 8.1%, those of all other regions were around 5 to 6% - as compared to 9% in the European average. Furthermore, employment rates exceeded the European average of 63.7% in all but the Hungarian CENTROPE regions and Trnava. The highest shares were to be observed in Lower Austria (69.9%), Bratislava (69.6%) and Burgenland (68.1%). Vienna and South Moravia were very close to the European average. CENTROPE is thus in its majority composed of regions that are – relative to the EU-average – privileged in terms of the labour market situation. Yet, some labour market problems persist. These may be summarised as follows: Due to a history of early retirements and the downsizing of the labour force in the course of industrial restructuring, employment rates of the population aged 55 and above are low relative to the EU level in four regions of CENTROPE. In Bratislava and South Moravia the rate is above the European average of 42.5%, in the Hungarian CENTROPE regions it remains only slightly below this value. In all Austrian regions where early retirement was particularly popular until recent changes in the pension system, employment rates of the elderly are around 30%; they are even lower in Trnava (28.8% - for corresponding NUTS II region West Slovakia). Aside from low employment rates of the elderly, youth unemployment rates are above the EU- average in Vienna, South Moravia and Trnava, but below this average for CENTROPE as a whole. Youth unemployment has recently also been on the decline in most Austrian provinces. Given the low overall unemployment rates the share of long term unemployed is relatively high in some of the new member states' regions of CENTROPE but low in the Austrian CENTROPE regions. In the year 2005 Bratislava and the Hungarian CENTROPE regions were below the European average, while Southern Moravia and the Slovak CENTROPE region around Trnava stayed above. This indicates a severe mismatch problem of the qualifications of the unemployed with the requirements of prospective employers, as would be expected in economies with the speed of restructuring of the CENTROPE region.
  7. 7. CENTROPE Business and Labour Report, No. 0, 2007 7 Finally, lack of skilled labour is reported very frequently across the region. This applies both to the automotive industry (in the Czech Republic and Slovakia in particular), as well as to many segments of the high-skill service sector such as health-care personnel, architects, civil engineers and IT experts. These developments may also be partly attributed to the large inflow of FDI, which spurs the demand for skilled labour. Thus in summary the labour market situation of the CENTROPE region as viewed from aggregate indicators can be described as relatively favourable when compared to the EU average. Furthermore – and perhaps more surprisingly – labour market patterns in the CENTROPE regions are more similar and less strongly influenced by cross-country differences than often perceived. When clustering all EU member states' regions according to the above-mentioned labour market indicators, we find that all CENTROPE regions are clustered into what may be considered a typical Central European Labour market group encompassing – aside from CENTROPE – southern Germany, Northern Italy and the remaining provinces of Austria. An analysis of labour market developments with respect to different skill types, however, shows that the CENTROPE region has a supply structure which differs from that of the most developed EU- countries: CENTROPE has a significantly smaller proportion of people with low levels of education as well as a smaller proportion of people with the highest levels of education. Despite having a small number of people with the lowest levels of education in their labour force, the employment and unemployment rates the position of this group in the labour market of the new member states’ regions of CENTROPE is much worse compared to the same group of workers in the EU-15 labour markets (a gap of 20 to over 30 p.p. in employment and unemployment rates). This is due to the combination of heavy industrial restructuring in the last decade, which has led to massive shift of labour demand to more highly qualified occupations, and a narrowly defined professional education system which contributes to low flexibility of labour markets. On the other hand, the employment rates of the medium- and highly educated do not differ much between the NMS and the EU. At the high-skill end of the labour market, an interesting phenomenon is to be seen: in this segment of the labour market there are clear signs of the situation being much tighter in CENTROPE than in the EU: In view of high and rising employment and very low unemployment rates, the demand for highly skilled labour currently exceeds the supply. The situation is even tighter where the 25-35 year age group is concerned. CENTROPE regions: Austria The regional growth pattern in Austria in 2006 was mainly determined by the regions sectoral patterns of economic activity. The export oriented manufacturing sector dominated regional developments and its dynamics also spilled over to other sectors. This resulted in a clear West – East differential in regional growth in 2006, such that the CENTROPE provinces of Austria in general exhibited below average growth. Among these provinces Burgenland and Vienna showed the lowest GDP growth in Austria. In Burgenland the balance was slightly improved by a booming construction sector. In Vienna the total weight of restaurants and accommodation and the energy sector, which grew stronger than in the rest of Austria was not high enough to compensate the low growth of other sectors. The only exception to this is Lower Austria, where, given its strong manufacturing base, aggregate real GVA growth amounted to +3.8% in 2006. Besides manufacturing producer services and in particular the knowledge intensive services tended to grow significantly in Austria in 2006. Though in general the western provinces auf Austria expanded employment more in these sectors, the highest increase in employment in knowledge intensive
  8. 8. CENTROPE Business and Labour Report, No. 0, 2007 8 industries was recorded in Lower Austria. By contrast Vienna and Burgenland experienced below average increases in employment both in the knowledge intensive employment sector as well as in the “other market services” in total. In tourism the number of tourist nights spent stagnated relative to 2005 in Austria. This is, however, primarily due to the trend to shorter stays. Tourist arrivals increased by 2.7%. This trend towards shorter stays was accompanied by an increase in expenditure per night spent, so that despite a reduced number of overnight stays turnover in tourist revenues was by 4% higher than last year. The CENTROPE regions in Austria, especially Vienna performed on average better than other Austrian regions in tourism. Given the fact that city tourism is one of the fastest growing segments of the Austrian tourism industry, Vienna was the region with the largest increase in the number of tourist nights in Austria in 2006. The strong income and output growth caused substantial labour demand growth in 2006. Nation wide employment grew by 1.7%. Employment growth, however, was regionally strongly differentiated and followed the general lines of regional development: As with GVA growth, the western non CENTROPE provinces of Austria and the provinces with a strong industrial base, expanded employment more rapidly than the eastern CENTROPE provinces of Austria, which are less export oriented. In total employment growth in the Austrian parts of the CENTROPE region amounted to 1.3% in 2006. From a sectoral point of view employment growth was primarily driven by the increase in employment in market oriented services, in particular producer services. However, also all other major sectors of the economy such as construction, and non market services (and in the western provinces of Austria even manufacturing) expanded employment in 2006. The below average employment growth in the Austrian CENTROPE region is primarily due to slow employment growth in Vienna. Vienna had the lowest employment growth rate among all Austrian provinces in 2006. This reflects a long term development due to the major restructuring processes that affected Vienna in the last decade, especially with respect to employment in manufacturing industries. In addition to this traditional decline in manufacturing employment the year 2006 was also marked by a noticeable reduction in trade employment. The high employment growth led to a relatively evenly distributed reduction in regional unemployment rates in 2006. The average unemployment rate in Austria decreased by 0.5 percentage points to 6.8% (according to national methodology) in 2006. Vienna was once more the province with the highest unemployment rate in Austria and the reduction in the number of unemployed was also smaller than in the remainder of Austria. The number of long term unemployed, however, reduced by 40.6%, which is the strongest decrease in long term unemployment among the Austrian provinces. CENTROPE regions: Czech Republic The Czech CENTROPE region South East is formed by South Moravia. This region was amongst the fastest growing regions in the Czech Republic during the transformation period but also during the latest years. A major role in successful regional development of South Moravia is played by the Brno agglomeration. Being the second largest city in the Czech Republic, it is one of the main centres of economic activity in the Czech Republic. Due to Brno’s relatively high economic potential, as well as due to its function of a location for higher education and for research and development, it has a significant influence on the general sectoral pattern of activity in South Moravia. Thus, despite its strong industrial base South Moravia has -in Czech terms- a relatively high share of services (and a relatively lower share of agriculture) in output and employment. Additionally Brno is also one of the main factors of the relatively high amount of foreign direct investment South Moravia received over the
  9. 9. CENTROPE Business and Labour Report, No. 0, 2007 9 last decade. These inflows of foreign capital in high-tech manufacturing industries and commercial services and increasingly also in R&D played a significant role in the economic restructuring process and are the foundations for further economic growth of South Moravia. During the transformation period employment patterns in the Czech Republic as well as in its regions underwent significant structural changes. Most significantly, employment in the primary sector decreased while contrastingly employment in services, like financial services and tourism, increased. These general trends were apparent in the whole of the Czech Republic, though not without a certain regional differentiation. In South Moravia the intensity of structural changes regarding employment was less pronounced than in the rest of the Czech Republic. Thanks to higher employment growth in the tertiary sector the employment decline was essentially lower in South Moravia than elsewhere. At the same time the structure of employment has continually advanced towards the employment structure in West European countries. The most important sector in terms of its share in total employment is still the manufacturing industry, which employs more than a quarter of all employed in South Moravia. Second most important are business services, as well as wholesale trade and repair followed by the construction business. From 2005 to 2006 employment increased especially in the majority of manufacturing industry branches. Thus, the highest employment growth rates occurred in the production of transport facilities, in the production of computers and business machines and the production of television sets. Other branches with the significant employment growth of are business service and construction Contrastingly, the number of employees in agriculture and forestry has decreased from 2005 to 2006, while in the sectors relating to public services the employment situation was stable. The outlook for the Czech CENTROPE region South East, and its sub-region South Moravia is in general positive. Especially with respect to future inflows of FDI expectations are optimistic as both regions have a tradition in institutional business support, especially in establishing industrial and development zones. Furthermore, given the availability of a highly educated workforce, the high innovation potential of the region and its good accessibility it is expected that (foreign) investments will be made in the fields of higher technology intensive manufacturing industries and services. This will not only transform the regions economic structure to a more modern shape, but also be the basis for a sustained period of economic prosperity. CENTROPE regions: Hungary The Hungarian part of CENTROPE comprises the counties of Győr-Moson-Sopron and Vas both located in the NUTS II region of Western Transdanubia. This region belonged to the ten fastest growing NUTS II regions in the EU in the last decade (only the Baltic countries, Ireland and two other Hungarian regions – Central Hungary and Central Transdanubia – had higher growth rates). The unemployment rate in the region was at 5.9% according to the Labour force survey in 2005 and thus the second lowest in Hungary. The Hungarian CENTROPE regions greatly benefited from economic transition by attracting international investors; however, the internationalization process and the economic development it induced differs significantly within the region: Income levels are highest in the most northern region of Győr-Moson-Sopron and decrease as one moves southward, with Vas still growing significantly above the national average and the region of Zala (which does not belong to the CENTROPE region) lagging behind. This uneven intraregional development is due to differences in industrialisation (Vas is much more burdened with a high share of labour intensive industrial employment than Győr-Moson-Sopron) but also to different responses to internationalisation. Győr-Moson-Sopron has attracted more
  10. 10. CENTROPE Business and Labour Report, No. 0, 2007 10 international capital and the firms coming into the region on average execute more "headquarter functions" than international firms in Vas. In addition to production-oriented activities, research and development is increasingly carried out at the Hungarian location as well. Consequently, the firms' competitiveness relies less on low labour cost, which reduces their vulnerability to increases in Hungarian wages and salaries. In addition, while companies in Vas seem to have little business links with local firms, regional supplier networks and clusters are formed in Győr-Moson-Sopron. The higher level of regional embeddedness of international firms in that region provides an important impulse to the regional economy. Despite its privileged role in previous years, in 2005, total real GVA declined in the Hungarian CENTROPE. In all of Hungary real GVA growth ranged between +7.6% (in Central Hungary) and - 1.8% (in West Transdanubia). Real GVA in the Hungarian CENTROPE region, which is part of Western Transdanubia, reduced by -1.3% relative to the previous year in 2005, with Vas experiencing a reduction of real GVA of -2.8% and Győr-Moson-Sopron performing much better but also far below the national average (-0.4%). Since the decrease of the GDP growth has continued in Hungary, in 2006 (+3.9%) and the first half year of 2007 (+2.7%, lowest among the CENTROPE countries), we expect that the relative position of the Hungarian CENTROPE region regarding indicator on GDP per capita in PPS should also have declined, recently. In addition to the austerity package which impacted on all Hungarian regions, the Hungarian CENTROPE was also influenced by a number of region specific developments: In particular, due to a combination of regional policy concentrating more on the poorer regions of Hungary and a natural catching up of these regions, Western Transdanubia – as the best developed region in Hungary - also experienced a slower growth than many of the other regions in Hungary and in a number of key industries (e.g. textiles and manufacturing) relocation of production sights further contributed to the decline. The trend regarding unemployment has by contrast shown a better picture in the Hungarian CENTROPE region than in the rest of the country. While the changes in number of registered unemployed1 in total and by sex indicate a relatively moderate decrease nationally, and even some increases in some regions, those indicators significantly decreased in the Hungarian CENTROPE region. Regarding the future of labour market development there is a better view for Győr-Moson-Sopron than Vas within the Hungarian CENTROPE region. While the offers for jobs increased in Győr-Moson- Sopron, they decreased in Vas in 2006. In turn, the gap between non-occupied vacancies and number of unemployed (searching for job) increased in Vas and decreased in Győr-Moson-Sopron. As a result of this in Győr-Moson-Sopron there were 2 unemployed searching for 1 vacancy in 2006 compared to 4 in 2005. In Vas this indicator increased from 8 to 10. CENTROPE regions: Slovakia Both, Bratislavský kraj and Trnavský kraj, which form the Slovak CENTROPE regions, are the most economically prosperous regions in the Slovakia. Yet, they are not directly comparable. Bratislavský kraj has enormous locational advantages and excellent starting conditions as a capital city. The inflow of foreign direct investments together with domestic investments are one of the relevant driving forces in its robust economic development. The urban character of this region predetermines the Bratislava region to be the centre of economic, financial and scientific progress in 1 Since 2006 the expression of ’registered unemployed people’ has changed to ’registered people searching for job’ in Hungary. By its content the meaning of the indicator is the same. To keep the unity of the text of the whole report, we use the traditional term for Hungary, too.
  11. 11. CENTROPE Business and Labour Report, No. 0, 2007 11 Slovakia. The capital city character shapes this region as centre for many headquarters and public administration institutions which implies the creation of jobs with high labour productivity. Trnavský kraj draws its economic advantage from the proximity to the Bratislavský kraj, to the Czech Republic and northwest Hungary with their developed transport infrastructure. In the development of this region there is a north-south growth gap: The area near the Czech border is fast growing while the south-eastern area is somewhat lagging behind. The uneven inflow of foreign direct investments mostly to the western and north-western parts of the region only confirms and further deepens this trend. The south-western districts of the region are characterized by a typical combination of rural and small urban areas with a few key industries and a low level of diversification. The restructuring of industrial activities led to decline in several important enterprises in this region. Some of these key industrial branches were able to cope with the ongoing restructuring and revived their production, but they were not able to restore previous level of employment. An important characteristic of the southern, lagging behind area of this region is demographic depression, i.e. ongoing out-migration. The leading role of both regions, but also the differences across the two regions is seen in the labour market. Hence in Bratislavský kraj the economic activity rate is about 4 percentage points above the Slovak average. The economic activity rate in Trnavský kraj is higher compared to the Slovak average, but still behind the rate of Bratislavský kraj. This is mainly due to the southern part of Trnava with large shares of agriculture and the north-west districts characterized by mountainous relief and an underdeveloped local infrastructure. The lagging districts are characterised also by a significant share of voluntary and long term unemployment. The unemployment rate in Bratislavský kraj is the lowest in the Slovak Republic. It is close to the natural unemployment rate and has mainly frictional character. The unemployment rate in Trnavský kraj is also traditionally below the Slovak average. Within the Trnavský kraj a similar pattern as in the case of the economic activity rate is observable. From a macroeconomic perspective of the labour market, Bratislavský and Trnavský kraj can be seen as non-problematic. The favourable position of Bratislavský and Trnavský kraj is visible also from their economic structure. The total number of industries in Bratislavský and Trnavský kraj comprise about 24% of all enterprises in the Slovak republic. Notably, West Slovakia and Bratislavský kraj together inhabit more than 52% of Slovak enterprises. The share of value added of Trnavský and Bratislavský kraj has grown from 32% in 2000 to more than 42% in 2005. In 2005 in Bratislava and West Slovakia more than 63% of total value added in Slovakia has been produced. One of the economic sectors considered important is tourism. When comparing Bratislavský and Trnavský kraj there are similar conditions with respect to number of lodging facilities. In comparison with Trnavský kraj, Bratislavský kraj is in better position in number of available beds. This can be explained by larger number of bigger hotels. There is also difference in the number of visitors. There have been over three times more visitors in Bratislavský kraj in the year 2005 as in Trnavský kraj. On the other hand, Bratislavský kraj seems to be less attractive for long term staying tourists compared to Trnavský kraj, which is due to the frequent number of one night stays and conference/business tourism which is characteristic for Bratislavský kraj, compared to leisure time tourism in Trnavský kraj. As far as changes in the economic development are concerned, both Slovak CENTROPE regions are the leading regions in Slovakia. Looking at labour productivity development from 2001 to 2005, it increased in the Slovak Republic by 42%. In the Slovak CENTROPE regions the increase was more than average. Hence labour productivity growth in Bratislavský kraj was around 55% and in Trnavský kraj around 54% in the same period of time. Restructuring of the industrial sector in these regions as well as steady increases in labour productivity in already operating enterprises play the most
  12. 12. CENTROPE Business and Labour Report, No. 0, 2007 12 significant role in the growth of productivity. The difference in labour productivity is reflected in the changes in nominal monthly wages. The average nominal monthly wage in Slovakia has increased in the years 2001 - 2005 by 36%. Given the higher productivity growth in Bratislavský and Trnavský kraj the growth of wages in the former was more than 2 percentage points and in the latter by 1 percentage points higher than the Slovak average. The high economic growth contributed also to higher employment rates in Slovakia and in the CENTROPE regions as well. The overall Slovak employment grew by 2.8% between 2001 - 2005. Again, the Slovak CENTROPE regions performed much better. Bratislavský kraj recorded an employment increase of 7% and Trnavský kraj an increase of 5.7%. From a sectoral point of view most jobs in Bratislavský kraj were created in real estate activities, public administration and financial intermediation. The largest decline in employment was in education and agriculture, hunting and forestry. The highest employment growth in Trnavský kraj was recorded in manufacturing, construction, public administration, hotels and restaurants, and real estate activities (1,070 jobs). The sharpest decline was observed in agriculture and wholesale and retail sale and in education. Concluding, the general outlook for the CENTROPE regions with respect to employment can be seen as quite promising. In addition the growing number of IT industries can be seen as positive as well. The steady growth rates of the secondary and tertiary sectors provide jobs opportunities for a large share of citizens, create favourable economic and social conditions thus accelerating the necessary convergence process to the EU average. Policy recommendations In summary, thus, the CENTROPE region can be characterised as a heterogeneous transitory region, which is located at the intersection of the high income western European centres and the rapidly growing Eastern European countries. Economic ties and cross-border activities within CENTROPE, however, have increased significantly over the last decade and a half since one quarter of the enterprises in the region are co-operating across borders. On the institutional front, however, the still existing institutional and physical barriers, e.g. in the fields of labour mobility and transport infrastructure (especially with respect to the Austrian regions of CENTROPE), hamper the full exploitation of the economic potential of CENTROPE. It can be expected that these ties will strengthen further in the near future, as the planned measures to close existing gaps and eliminate bottlenecks in the cross-border transport network as well as to step up the modernisation of the existing infrastructure will improve internal and external accessibility. Thus, one consequence of the increasing economic integration of the regions forming CENTROPE, is a necessary parallel evolution of cross-border policy making. In consequence, to facilitate economic cooperation, cooperation in the fields of economic policy is a must. In the end, a successful development of CENTROPE depends crucially on the integration of policy makers, with respect to sharing similar goals and as a consequence also the same decisions. -> Strengthening comparative advantages In this respect one of the central objectives of economic policy is and will be to secure and improve the regions attractiveness as a location for investments. Given the comparative advantages of CENTROPE as a location for ancilliary industries, developing and deepening existing cross-border supply chains should be one of the priorities for policymakers. In the field of SME policy the key issue in this respect is to provide highly visible information on potential partners for cross-border co- operation.
  13. 13. CENTROPE Business and Labour Report, No. 0, 2007 13 -> Fostering cross-border innovation systems In the long run the competitiveness of the CENTROPE region, like the competitiveness of all other regions in developed countries, will, however, strongly depend on its capability to compete in international markets for technologically advanced products. Thus activities aiming to maximize cross- border knowledge spillovers and to establish an efficient cross-border innovation system will be central for the future development of the region. This suggests that initiatives which aim at increasing the mobility of researchers and university students within the region as well as initiatives to increase cross-border co-operation in the field of research and development should receive high priority in the future. -> Investing in public infrastructure Developing cross-border co-operation will, however, also require investments in infrastructure. While the insufficient state of road and more generally transport infrastructure in CENTROPE has been often lamented, recent investment plans suggest that policy is at least partly responding to the bottlenecks that still exist. However, other areas of public infrastructure development should also be increasingly considered from a cross-border perspective. Co-operation activities in the schooling system are a good example of the returns that can be gained from such initiatives. Co-operation should, however, become increasingly common in all fields of public service provision ranging from communal services to healthcare. -> Developing cross-border actor networks Closely related to this, substantial efforts should be put into further developing decentralised cross – border actor networks and bringing these networks to deliver services and policies, which represent a noticeable improvement of the living conditions for the population of CENTROPE. In some areas (such as in the field of labour market policy) such actor networks already exist. Here the key to further development will be to demonstrate the achievements also to the wider public. In other areas (such as communal and public services), by contrast, such networks will have to be more forcefully developed, to better identify areas of co-operation. -> Coordinating labour market policies Finally, in the field of labour market policy future activities should increasingly focus on the exchange of best practice measures for active labour market policy and for tackling the shortage of skilled labour that is by now almost ubiquously felt in CENTROPE. Establishing efficient channels for cross-border placement activities for workers will be another important issue in cross-border labour market management. Given the similarity in many labour market problems in CENTROPE and the increased demand for cross-border placement of workers that can be expected to emerge when current institutional impediments to cross-border labour mobility will be removed, much can be expected from such measures.
  14. 14. CENTROPE Business and Labour Report, No. 0, 2007 14 Table of Contents 1 Introduction..................................................................................................................................... 15 2 Macroeconomic Developments in the CENTROPE countries ....................................................... 17 2.1 Global environment................................................................................................................. 17 2.2 Economic growth in the CENTROPE countries and its sources ............................................ 17 3 The economic situation of the CENTROPE-regions in a European context.................................. 31 3.1 Introduction ............................................................................................................................. 31 3.2 Economic Development of CENTROPE................................................................................. 34 3.3 Cross Border Flows ................................................................................................................ 40 3.4 Labour Market Development of CENTROPE ......................................................................... 42 4 Regional Development in the Austrian Part of CENTROPE .......................................................... 51 4.1 Introduction ............................................................................................................................. 51 4.2 Manufacturing Sector Development in the CENTROPE Regions .......................................... 54 4.3 Construction, Energy & Services in the Austrian CENTROPE Region .................................. 57 4.4 Tourism in the Austrian CENTROPE ...................................................................................... 59 4.5 The Labour Market in the Austrian CENTROPE .................................................................... 60 4.6 Labour Market Developments at district level......................................................................... 63 5 Czech Republic - South Moravia.................................................................................................... 66 5.1 Introduction ............................................................................................................................. 66 5.2 Development of Gross Domestic Product............................................................................... 66 5.3 Development and structure of Gross Value Added ................................................................ 67 5.4 Employment ............................................................................................................................ 70 5.5 Development and structure of unemployment ........................................................................ 71 5.6 Foreign Direct Investment....................................................................................................... 72 5.7 Conclusions - critical issues.................................................................................................... 74 6 Regional Development in the Hungarian Part of CENTROPE....................................................... 75 6.1 Introduction ............................................................................................................................. 75 6.2 Manufacturing Sector Development in the CENTROPE Regions .......................................... 79 6.3 Construction, Energy & Services in the Hungarian CENTROPE Region ............................... 82 6.4 Tourism in the Hungarian CENTROPE................................................................................... 84 6.5 The Labour Market in the Hungarian CENTROPE Region .................................................... 86 The Slovak Regions .............................................................................................................................. 90 6.6 GENERAL BACKGROUND ON REGIONAL DEVELOPMENT OF SLOVAK REGIONS ...... 90 6.7 FUTURE DEVELOPMENT PROSPECTS OF NUTS II REGIONS ........................................ 91 6.8 ECONOMIC AND SOCIAL DEVELOPMENT OF CENTROPE REGIONS IN SLOVAKIA..... 92 7 Summary & Policy Conclusions ................................................................................................... 101 7.1 Macroeconomic developments of the CENTROPE countries .............................................. 101 7.2 The Economic Situation of the CENTROPE Region ............................................................ 101 7.3 The Labour Market Situation in the CENTROPE Region ..................................................... 103 7.4 CENTROPE regions: Austria ................................................................................................ 104 7.5 CENTROPE regions: Czech Republic .................................................................................. 105 7.6 CENTROPE regions: Slovakia.............................................................................................. 108 7.7 Policy Conclusions ................................................................................................................ 109 7.8 References............................................................................................................................ 114
  15. 15. CENTROPE Business and Labour Report, No. 0, 2007 15 1 Introduction The CENTROPE region is one of the most important transnational economic areas at the former Eastern borders of the European Union. Being located at the intersection of four countries, comprising two capital cities as well as several further major cities (Brno and Győr) and covering some of the most dynamic regions in the Central and East European countries as well as some of the most prosperous regions within the EU (Vienna), CENTROPE is considered a region of enormous economic potential. Situated at the crossroads of important European transport corridors and disposing of efficient international airports, CENTROPE offers excellent accessibility and short distances to all European key markets. Given its large and expanding market together with its favourable location and high accessibility, CENTROPE is one of the European key areas for both large and small to medium scale investment. The high number of institutions of research and development and higher education in CENTROPE add to this, and are a key factor to attract highly innovative industries and services, which in turn are the basis for a sustained period of economic growth and prosperity. The economic ties and cross-border activities within CENTROPE have increased significantly over the last decade and a half. It can be expected that these ties will strengthen further in the near future, as the planned measures to close existing gaps and eliminate bottlenecks in the cross-border transport network as well as to step up the modernisation of the existing infrastructure will improve internal and external accessibility. However on the institutional front the still existing institutional and physical barriers, e.g. in the fields of labour mobility and transport infrastructure (especially with respect to the Austrian regions of CENTROPE), hamper the full exploitation of the economic potential of CENTROPE. Thus, one consequence of the increasing economic integration of the regions forming CENTROPE, is a necessary parallel evolution of cross-border policy making. In consequence, to facilitate economic cooperation, cooperation in the fields of economic policy is a must. In the end, a successful development of CENTROPE depends crucially on the integration of policy makers, with respect to sharing similar goals and as a consequence also the same decisions. The broad aim of the CENTROPE “Business and Labour Report” is to base these decisions on accurate, comparable and timely analysis of the economic development of CENTROPE and its regions. As such this report intends to assist all the relevant actors (e.g. economic agencies, networks of entrepreneurs, trade unions, politicians and administration) in monitoring the economic development of the transnational economic space. Additionally this report intends also to serve as a basis for discussion of labour market and employment issues and policies, as well as of investment and location policies, to make CENTROPE an attractive region for local and foreign investors. Importantly, it must not be forgotten that this first issue of the CENTROPE “Business and Labour Report” is a pilot project. This implies that beyond writing this report, much effort from all participating institutions was spent in making this report feasible at all. Thus, before actually drafting the report a lot of background work had to be done. In detail this means that the current report is the result of an intensive work programme that included four work packages. The first work package was concerned with setting up a multilateral working group. Therefore, to gain as detailed as possible knowledge of the individual regions within CENTROPE the aim was to find one competent partner from each CENTROPE country. Each partner, given his experience and knowledge
  16. 16. CENTROPE Business and Labour Report, No. 0, 2007 16 of local regional development had at least three tasks to fulfil, namely to act as a contact person for any questions concerning his region/country, to gain access to the relevant statistical data and to write the report for his country. In the end, after a longer than expected search, a multilateral working group was established. The partners in the group consist of the Austrian Institute of Economic Research (WIFO) and the Vienna Institute for International Economic Studies (wiiw) from Austria, Institute for Structural Policy (IREAS) of the Czech Republic, the West Hungarian Research Institute from Hungary and the Slovak Academy of Sciences. The second work package centred around finding an appropriate set of contents for the pilot CENTROPE “Business and Labour Report”. At this stage all partners worked together, to establish a common set of topics that realistically could be covered, given the differences of data availability across countries. The third work package dealt with data and methodological issues. A main aspect in this package was to create a basic set of indicators that are common and comparable across the CENTROPE countries, in order to ensure that in its essential results the “Business and Labour Report” is homogenous. Besides this common data set, it was decided that each partner should if possible use any available additional data, which might not be comparable to data from other countries, to deepen the analysis and interpretation in the report. Finally the fourth work package consisted of drafting and writing this proto-type version of the CENTROPE “Business and Labour Report”. In a sense this first version of the CENTROPE “Business and Labour Report” is symbolic for the character of CENTROPE. On the one hand five institutions of CENTROPE were gathered together, and every participating institution was highly ambitious to jointly work on this report, in order to make it valuable source of information. Thus four different parties worked to together on a worthwhile project, which is also what CENTROPE in toto is about. At the same time the joint work has not been without difficulties. Different methodologies and experiences of the partner institutions, and even more the heterogeneity of available data sources, made it difficult to present this report and the chapters therein in a homogeneous way. This is reflected in the fact that the country chapters focus on a small, though important, set of indicators, namely income, output and employment, while a number of important other indicators had do be discarded as they were not available in the course of this project. The major achievement of this report is, however, that for the first time this report shows in a concise way the economic development of CENTROPE, and thus already provides a significant value added. But also the problems that arose in the course of the project provide important information, as they show the tasks for future work in order to make this report an even more valuable project. This is another aspect in which the CENTROPE “Business and Labour Report” reflects the CENTROPE idea and project: To work open-minded and jointly on the existing problems, in order to make this report and the whole CENTROPE better ever time. The structure of the report is as follows: Chapter 1 presents a short introduction, chapter 2 highlights the macroeconomic developments in CENTROPE, chapter 3 analyses the role of the CENTROPE regions in the EU-25, chapter 4-8 present the economic development of the CENTROPE regions in the individual countries and chapter 8 provides a summary and conclusions.
  17. 17. CENTROPE Business and Labour Report, No. 0, 2007 17 2 Macroeconomic Developments in the CENTROPE countries Author: Roman Römisch, Vienna Institute for International Economic Studies 2.1 Global environment In 2006 global economic growth amounted to 5.4% and world trade expanded close to 9%. Rising oil prices coupled with rapid global economic growth initially raised fears of inflationary pressures only to recede when oil prices dropped in the second half of the year. Economic performance in the European Union (EU) registered 3% growth in 2006, with expansion in the Eurozone being the best in six years: 2.7%. The engine of growth in the EU was domestic demand, with investment in machinery and equipment taking the lead. Private consumption only expanded at a moderate pace. Net exports supported growth, especially in the last quarter of 20062. Global growth is expected to remain strong in both 2007 and 2008, yet somewhat less robust than in 2006, mainly due to a more pronounced decline in the US growth rate: down from 3.3 to 2.2%. It is assumed that the EU and Japan will record the same (or only marginally lower) growth rate in 2007 as in the previous year. In world trade, less buoyant activities in global manufacturing will yield a robust rate of growth, albeit 1.5 percentage points lower than in the previous year. Oil markets will remain tight in 2007. Survey data in the European Union hint at the continuation of robust growth. The European Commission’s spring 2007 forecast assumes 2.9% in the EU and 2.6% in the Eurozone. Whereas growth in consumption will lag behind that of GDP, the rate of investment growth is expected to expand vigorously; it will be backed by solid corporate profitability, a high rate of capacity utilization, favourable financial conditions and the challenges posed by the rapid development of new technologies. Employment will increase by 1.4%, accompanied by a substantial 0.7 percentage point decline in the unemployment rate: down to 7.2%. Both the government deficit/GDP ratio and the government debt/GDP ratio are expected to improve over the current year. Consumer-price inflation in the EU-27 and the Eurozone will amount to 2.2% and 1.9%, respectively. As in the previous year, the current account deficit/GDP ratio in the EU-27 will remain negligible. The risks on which the EU forecast is predicated are for the most part on a par with those that global development faces. EU-specific risks might possibly include: a more buoyant upswing in consumer spending than expected owing to a rise in employment; wage pressures as a consequence of tightening labour markets; and a boost to consumer confidence which might ultimately give rise to inflationary pressures in late 2007 and 2008. 2.2 Economic growth in the CENTROPE countries and its sources Growth Overall the year 2006 was a good year for the CENTROPE countries in terms of economic growth (see Table 1). Slovakia recorded its most rapid expansion since transition began (+8.3%), while the Czech Republic maintained robust growth. Only Hungary was an outlier – at least among the new 2 Economic forecast Spring 2007, European Commission.
  18. 18. CENTROPE Business and Labour Report, No. 0, 2007 18 Member States of the EU (NMS) in CENTROPE – as growth of GDP was less than 4% as a consequence of the austerity package introduced in the middle of 2006. Austria, though growing at a slower pace than its Eastern neighbour countries still recorded a GDP growth rate of more than 3% - for the first time since 6 years. In total, the CENTROPE countries grew faster than the EU-25 in 2006 in terms of real GDP, thus prolonging the period, that started in 2004 for Austria and already 2001 for the other three countries, of growing ahead of the more advanced EU member countries. With that the catching-up process of Hungary, the Czech Republic, and Slovakia to the level of development of the ‘old’ EU has continued, and in the case of the latter two countries even accelerated over the last couple of years. The first quarter of 2007 brought about a considerable acceleration of economic growth in Slovakia, yet in the same period a remarkable deceleration was registered in Hungary. The Czech Republic recording a more modest pace, while Austrian GDP continued to show a rising trend. Table 1 Gross domestic product real change in % against preceding year 2002 2003 2004 2005 2006 2006 2007 2007 2008 1st quarter forecast Austria 0.9 1.1 2.3 2.0 3.3 3.2 3.5 3.4 2.4 Czech Republic 1.9 3.6 4.6 6.5 6.4 6.6 6.1 5.0 5.2 Hungary 4.4 4.2 4.8 4.1 3.9 4.9 2.7 2.7 3.1 Slovak Republic 4.1 4.2 5.4 6 8.3 6.7 9 8.5 8 CENTROPE-countries 2.8 3.3 4.3 4.6 5.2 5.3 4.9 4.3 4.3 EU 25 1.2 1.3 2.4 1.8 3.0 3.2 3.4 2.9 2.4 Source: wiiw, WIFO, Eurostat. The sources of economic growth in the CENTROPE countries were, however, differentiated (Table 2). On the one end Slovakia showed a mix of sources of growth, as half of the country’s growth came from consumption and a quarter from investment, with net exports contributing a considerable amount. This trend seems to have continued in the first quarter of 2007. The increase in consumption is expected to grow at a somewhat slower pace than GDP. Although investment could increase more dynamically, it still keeps pace with the GDP expansion. In the first quarter of 2007, the net export position was strongly positive; the Slovak growth path can thus be seen to be broadly based and appears sustainable. In the Czech Republic the mix of growth components is more or less balanced, without any specific deterioration of net exports. In Austria consumption as well as net exports contributed slightly more than 40% each to growth, while investment demand was more sluggish and contributed around one fifth to overall growth. This trend seems to have reversed in the first quarter of 2007, as – given the more optimistic expectations of entrepreneurs - investment demand picked up significantly. At the same time consumption as well as net exports started to grow at slower pace than one year before. In Hungary though, the sources of growth in 2006 and the first quarter of 2007 reflect the impact of the austerity package. Consumption growth decelerated and declined in the first quarter, whereas net exports improved on a spectacular scale. While both effects were as expected given Hungary’s convergence programme, the drop in investments came as a surprise. A revival in
  19. 19. CENTROPE Business and Labour Report, No. 0, 2007 19 investment is an important prerequisite for returning to a growth path with substantially more dynamic expansion. Table 2 Contributions (percentage points) to the GDP growth rates 2006 2007 2002 2003 2004 2005 2006 IQ IQ Austria GDP growth rate (%) 0.9 1.1 2.4 3.3 3.4 3.2 3.5 Consumption 0.4 1.0 1.3 1.3 1.3 1.3 1.0 Gross fixed investment -1.5 1.4 0.1 -0.1 0.7 0.6 2.6 Trade balance 1.9 -1.3 0.9 0.8 1.4 1.7 0.7 Other items* 0.2 0.0 0 -0.1 -0.3 -0.4 -0.7 Czech Republic GDP growth rate (%) 1.9 3.6 4.6 6.5 6.4 6.6 6.1 Consumption 2.6 4.7 0.8 1.7 2.4 2.6 3.1 Gross fixed investment 1.5 0.1 1 0.6 1.9 1.6 0.4 Trade balance -2.2 -0.9 1.3 4.8 1.2 2.3 -0.4 Other items* 0.0 -0.3 1.5 -0.6 0.9 0.1 3.0 Hungary GDP growth rate (%) 4.4 4.2 4.8 4.2 3.9 4.9 2.7 Consumption 6.8 5.8 2.1 2.5 1.2 2.9 -0.6 Gross fixed investment 2.5 0.5 1.7 1.2 -0.5 1.6 -0.4 Trade balance -2.0 -2.5 0.5 2.9 3.7 2.0 2.2 Other items* -2.9 0.4 0.5 -2.4 -0.5 -1.6 1.5 Slovak Republic GDP growth rate (%) 4.1 4.2 5.4 6.0 8.3 6.7 9.0 Consumption 4.0 0.9 2.7 3.8 4.3 5.1 4.2 Gross fixed investment 0.1 -0.6 1.3 4.4 1.9 3.1 1.9 Trade balance -0.3 5.4 -0.9 -2.6 1.5 -1.8 4.6 Other items* 0.3 -1.5 2.3 0.4 0.6 0.3 -1.7 *Other items include change in stocks and statistical discrepancies Source: wiiw estimates incorporating national sources. As for the 2007 outlook in the current year, high GDP growth will continue to be characteristic for all CENTROPE countries, with the exception of Hungary. Slovakia will probably manage to exceed the rate of expansion it achieved in 2006, remaining in top form in terms of components of growth, with consumption increasing dynamically (albeit somewhat below GDP expansion), investments booming and net exports improving. The picture is less rosy for the Czech Republic. Although GDP growth will decelerate in 2007 by about 1.4 p.p., that is no reason for concern. More worrisome will be the unfavourable shift in components of growth. Consumption growth will outstrip GDP growth, while investment growth will slow down considerably. The first quarter results already point to a deterioration in the net export position. Within the framework of the country’s austerity programme, the Hungarian economy will hit rock bottom this year in terms of economic growth, attaining only about half of the GDP growth rate achieved by the NMS-53 as a group. Consumption will decline slightly, investments will grow modestly and the net export position will improve in a spectacular manner. Austrian GDP will grow at a somewhat slower pace than in 2006 only in 2008. According to the latest (autumn) WIFO forecast the Austrian economy will grow by 3.4% in 2007 and by 2.4% in 2008. Based upon more 3 The NMS-5 group consists of the Czech Republic, Hungary, Poland, Slovakia and Slovenia
  20. 20. CENTROPE Business and Labour Report, No. 0, 2007 20 optimistic outlooks investments will continue to grow at around 6.3% in real terms in 2007, but the strengthening of the Euro, contagion effects from the increase in the German VAT as well as an expected slowdown of the world economy will dampen Austrian exports, which are expected to grow by 9.0% this year, and by 6.5% in 2008. Furthermore, due to the moderate increase in wages in Austria, consumption growth will also be slightly lower in 2007 (with a forecasted growth of 1.9) as well as in 2008 (2.1%). Industrial Production Industrial production expanded dynamically in the CENTROPE countries, well above the rate of GDP growth (see Table 3). A considerable acceleration in industrial growth occurred in Slovakia (+6.6 percentage points from 3.3 to 9.9%), where the foreign owned manufacturing cluster has shifted into the top gear this year in terms of exports. The industrial output growth acceleration was also impressive in Austria (+4.4 percentage points), and though overall industrial production grew at a marginally slower pace than in the other CENTROPE countries (approximately 8%), the growth rate was around twice as high as in the Eurozone or the EU-27 aggregate. In the Czech Republic and Hungary, industrial output grew at approximately the same rate as in Slovakia (around 10%), though in the former countries acceleration of industrial growth was less spectacular, basically because industrial output grew already at high rates the years before. Forecasts for 2007 point to modest deceleration in industrial output growth in Austria, the Czech Republic and in Hungary, while a further acceleration of growth is expected for Slovakia. Table 3 Industrial production real change in % against preceding year 1) 2005 2006 2006 2007 2007 2008 1st quarter forecast Austria 4.4 8.4 6.0 8.5 5.0 3.0 Czech Republic 6.7 9.7 14.8 12.4 8.0 9.0 Hungary 7.0 10.1 13.3 8.8 8.0 9.0 Slovak Republic 3.6 9.9 9.5 15.2 14.0 10.0 CENTROPE 5.4 9.0 10.7 10.2 7.8 7.3 countries 1) Preliminary. Source: wiiw Database incorporating national statistics, forecast: wiiw Unit labour costs - competitiveness In the course of 2006 and continuing in the first months of 2007, unit labour costs in industry increased substantially in Slovakia and Hungary. In the Czech Republic they remained roughly constant, albeit with some fluctuations. At the same time productivity in industry increased at double digit or close to double digit rates in the three NMS countries of the CENTROPE region. Thus, increasing unit labour costs are primarily the outcome of strong appreciation of national currencies in the countries concerned.
  21. 21. CENTROPE Business and Labour Report, No. 0, 2007 21 This, however, had no detrimental effect on the these countries’ cost competitiveness, especially in those manufacturing branches where foreign investors are heavily represented (such as electrical and transport equipment). Though unit labour costs are an important indicator of competitiveness, the marked expansion of exports in Slovakia and Hungary points to other important factors governing competitiveness, probably related to upgrading the quality of commodity exports. The Austrian manufacturing sector by contrast was characterised by a moderate wage growth (of 2.3%) but rapid productivity growth (+7.3%). Thus unit labour costs improved once more in 2006. Thus Austria further improved its competitiveness in 2006, which also documented in a substantial improvement in the balance of trade. Figure 1 Unit labour costs in industry, 2004-2007 EUR-adjusted, year-on-year, growth in % CZ HU SK AT 40 30 20 10 0 -10 -20 ápr.04 aug.04 dec.04 ápr.05 aug.05 dec.05 ápr.06 aug.06 dec.06 ápr.07 Source: wiiw Monthly Database incorporating national statistics. Legend CZ=Czech Republic, HU=Hungary, SK=Slovakia, AT=Austria Foreign trade Customs statistics show an unanimous trend in foreign trade in goods in CENTROPE. Thus in all four CENTROPE countries export growth rates not only increased steadily over the period 2005-2006 and in the first quarter of 2007. They also were in general higher than the import growth rates, thus improving the trade balance significantly, and even turning into an export surplus in the first quarter of 2007. Current account The CENTROPE countries are characterized by marked differences in the current account. While throughout the last years Austria incurred a surplus in the current account (2004: +0.5%, 2005: 1.3% of GDP), the new member state countries showed persistent, high deficits (Czech Republic: 2004: - 5.3%, 2005: -1.6% of GDP, Hungary: -8.4%, -6.9% of GDP, Slovakia: 2004: -7.8%, 2005: -8.7 of GDP). At the same time foreign trade has been characterized by substantial structural change in
  22. 22. CENTROPE Business and Labour Report, No. 0, 2007 22 particular in the new member states among the CENTROPE countries. This structural change was marked by increased intra – industry trade and an upgrading of the technological content of products, which led to a continuing convergence of trade structures with the old member states. Table 4 Foreign trade of the CENTROPE countries (based on customs statistics) 1Q 06 1) 1) 2004 2005 2006 2007 1Q 2005 2006 - 1Q 07 EUR mn change in % Austria Exports 89847.6 94705.5 103742 27543 5.4 9.5 11.1 Imports 91094.4 96498.9 104200 27318 5.9 8.0 9.7 Balance -1247 -1793 -459 224 Czech Republic Exports 53995 62738 75645 21075 16.2 20.6 17.5 Imports 54824 61441 74078 19757 12.1 20.6 16.1 Balance -829 1297 1566 1318 . . . Hungary Exports 44630 50093 58442 16032 12.2 16.7 18.4 Imports 48550 52996 60418 16321 9.2 14 15 Balance -3920 -2903 -1977 -289 . . . 2) Slovakia Exports 22427 25771 33273 9789 15.8 29.1 37 Imports 23686 27748 35733 9868 18.2 28.8 27 Balance -1259 -1978 -2460 -79 . . . CENTROPE Exports 210900 233308 271102 74439 10.6 16.2 17.4 countries Imports 218154 238684 274429 73264 9.4 15.0 14.7 Balance -7255 -5377 -3330 1174 . . . 1) Preliminary. - 2) From 2005 data refer to trade excluding value of goods for repair. Source: wiiw. In 2006 the consequences of the austerity programme such as a less dynamic increase in consumption-related imports, sluggish investment and rapidly expanding exports led to an improving capital accounts to GDP (CA/GDP) ratio (from -6.9% in 2005 to -5.8% in 2006) in Hungary. In Slovakia, the comparatively high deficit in both 2005 and 2006 (2006: -8.3%) was partly caused by high profits accruing to foreign owned enterprises. This will also remain an important factor in the future. Despite the surplus in the first quarter of 2007 and the very dynamic expansion of exports, the CA/GDP ratio in Slovakia will come close to -5%, albeit only about half as high as the previous year. In the Czech Republic the export/import growth rate gap narrowed and the profits earned by foreign owned companies increased; this has resulted in a deterioration in the CA/GDP ratio from -1.6% in 2005 to -3.1% in 2006). In Austria the WIFO estimates a current account surplus of 2.2% of GDP for 20064. In many new member states, the deterioration of the current account is explained not by worsening trade balances or unfavourable changes in customary income positions, but by the ever greater role played by profits earned by foreign owned enterprises, which appear in their full volume as debit in the current account. A considerable part of these profits are reinvested, but this appears in the capital account as part of the FDI inflows. 4 There is no detailed analysis of the Austrian current account, because of a methodological change in the data collection. (Marterbauer et al. 2007)
  23. 23. CENTROPE Business and Labour Report, No. 0, 2007 23 Table 5 Foreign trade of the CENTROPE countries by partner countries, exports 2005 in mn € 2005 shares in total growth 2002-2005, rate in % AT CZ HU SK AT CZ HU SK AT CZ HU SK TOTAL 94705 62738 50093 25771 100.0 100.0 100.0 100.0 22.4 54.0 37.2 68.8 CENTROPE 7788 10640 5766 6917 8.2 17.0 11.5 26.8 17.1 66.1 51.7 59.9 countries Austria . 3514 2801 1821 . 5.6 5.6 7.1 . 55.9 8.4 55.3 Hungary 3223 1708 . 1459 3.4 2.7 . 5.7 -3.4 69.0 . 75.3 Slovak Republic 1640 5417 1433 . 1.7 8.6 2.9 . 53.9 72.5 172.2 . Czech Republic 2925 . 1532 3637 3.1 . 3.1 14.1 30.2 . 122.1 56.8 EU27 69302 53616 40435 22442 73.2 85.5 80.7 87.1 21.0 53.7 31.1 64.5 EU15 55449 41402 32799 14863 58.5 66.0 65.5 57.7 19.2 48.6 19.5 60.7 Germany 30108 21103 15073 6718 31.8 33.6 30.1 26.1 21.5 42.2 16.3 69.2 NMS10 13776 12214 7636 7579 14.5 19.5 15.2 29.4 29.4 74.0 124.8 72.4 SE-Europe 2048 576 1542 145 2.2 0.9 3.1 0.6 24.3 18.7 77.1 -30.0 USA 5350 1670 1519 808 5.6 2.7 3.0 3.1 33.4 43.5 19.2 265.9 ROW 9459 4741 4446 1701 10.0 7.6 8.9 6.6 32.6 73.5 99.1 157.9 Russia 1701 1130 940 402 1.8 1.8 1.9 1.6 77.7 107.1 95.2 164.5 ROW=Rest of the World, Source: wiiw, WIFO. Table 6 Foreign trade of the CENTROPE countries, imports 2005 in mn € 2005 shares in total growth 2002-2005, rate in % AT CZ HU SK AT CZ HU SK AT CZ HU SK TOTAL 96499 61441 52996 27748 100.0 100.0 100.0 100.0 25.2 42.8 32.7 58.4 CENTROPE 7349 7127 6227 5568 7.6 11.6 11.7 20.1 22.7 43.6 41.2 43.9 countries Austria . 2452 3501 1054 . 4.0 6.6 3.8 . 31.3 26.5 42.9 Hungary 2464 1324 . 1003 2.6 2.2 . 3.6 -3.6 56.7 . 109.6 Slovak Republic 1696 3351 1202 . 1.8 5.5 2.3 . 41.4 48.9 66.7 . Czech Republic 3189 . 1523 3512 3.3 . 2.9 12.7 42.6 . 65.1 32.3 EU27 73368 43921 36950 17489 76.0 71.5 69.7 63.0 24.2 40.9 42.6 37.3 EU15 62548 35455 30792 11450 64.8 57.7 58.1 41.3 23.4 36.9 37.1 29.9 Germany 40733 18483 14653 5799 42.2 30.1 27.6 20.9 31.0 32.3 51.2 46.4 NMS10 10795 8466 6158 6039 11.2 13.8 11.6 21.8 28.6 60.9 78.4 54.0 SE-Europe 759 91 328 248 0.8 0.1 0.6 0.9 55.2 6.0 99.9 88.7 other OECD 10925 6078 4732 2118 11.3 9.9 8.9 7.6 11.4 45.2 -2.6 83.7 USA 3175 1547 889 389 3.3 2.5 1.7 1.4 -15.0 10.2 -39.9 4.1 ROW 11446 11351 10985 7894 11.9 18.5 20.7 28.4 48.3 49.6 22.1 125.8 China 2981 3159 2861 894 3.1 5.1 5.4 3.2 112.2 58.7 29.6 144.9 India 275 194 84 68 0.3 0.3 0.2 0.2 52.4 81.9 -0.7 65.5 Russia 2262 3512 3912 2977 2.3 5.7 7.4 10.7 119.1 80.4 61.5 35.4 ROW=Rest of the World, Source: wiiw, WIFO
  24. 24. CENTROPE Business and Labour Report, No. 0, 2007 24 From 2007 onwards the 3 new member state (NMS) countries in CENTROPE will receive substantially more transfers from the EU budget than in their first three years of membership. For these countries these transfers will amount to about 2% of their GDP in 2007, double that of 2006. In 2008 and 2009 it will rise to around 3% of GDP. The overwhelming proportion of this inflow will, however, appear in the capital account of the balance of payments statistics, and not in the current account. This diminishes the relevance of the current account position as a benchmark for evaluating the external equilibrium of the countries concerned. Foreign Direct Investment (FDI) – a counterweight to trade deficit The FDI inflows into the NMS countries in CENTROPE altogether were lower in 2006 than in preceding years; the increase of FDI inflows in Slovakia was opposed by substantial declines in the Czech Republic and Hungary, which to some extent was to be anticipated given that the 2005 peak that was known to have been largely due to major privatization deals. Foreign exchange inflows through FDI play a considerable role in securing the external equilibrium of the recipient NMS by counterbalancing foreign exchange outflows due to deficits in the current account. Last year the Czech Republic managed to receive amounts of FDI (net) higher than their current account deficit. The opposite was the case in Hungary and Slovakia, whereby; the coverage of current account deficit through net FDI was especially weak in Hungary. Austria, by contrast is the only country among the CENTROPE countries, where outward FDI exceeds inward FDI. This is owed in particular to the important role played by Austrian investors in the new member states. Due to the investments in this region – and more recently also to countries in the former Soviet Union (FSU) - the outward FDI deficit, which was a major concern in the policy debate in the late 1980s in Austria, turned into a surplus. In 2007 it is expected that the FDI coverage of the current account deficit will to some extent be smaller than in the previous year in the Czech Republic and will remain low in Hungary. For Austria the increases in outward FDI are expected to continue at least in the medium term as firms strive to improve their market position in the new member states as well as in the former Soviet Union. Table 7 Inflow and stocks of Foreign Direct Investment 2007 2007 2004 2005 2006 2004 2005 2006 2006 forecast forecast EUR mn FDI net, % of CA stock EUR mn Austria 3134 7273 1749 – –89 –15 –33 – Czech Republic 4009 9354 4760 5000 68 572 104 81 58813 Hungary 3633 6099 4874 4000 40 69 47 43 62096 1) Slovakia 2441 1694 3324 3000 93 48 83 112 18000 CENTROPE Countries Note: CA means current account deficit. FDI net is defined as inflow minus outflow. 1) wiiw estimate. Source: National Banks of respective countries; wiiw forecasts.
  25. 25. CENTROPE Business and Labour Report, No. 0, 2007 25 Labour market situation improves Labour market conditions in the CENTROPE countries mainly improved in 2006. Following the trend in the EU-25 unemployment dropped significantly in Slovakia (from 16.3 to 13.4%) and moderately in the Czech Republic (from 7.9 to 7.1%). The already quite low unemployment rate in Austria (5.2%) fell to 4.7%. Only in Hungary there was a slight increase in the unemployment rate – from 7.2% in 2005 to 7.5% in 2006. Table 8 Harmonized unemployment and unemployment rates, LFS 2004 2005 2006 2004 2005 2006 in 1000 persons rate in % Czech Republic 426 410 372 8.3 7.9 7.1 Hungary 253 302 317 6.1 7.2 7.5 Austria 188 208 196 4.8 5.2 4.7 Slovakia 483 430 355 18.2 16.3 13.4 EU25 19724 19763 18209 9.1 9.0 8.2 Source: Eurostat The drop in the unemployment rate is largely attributable to rising employment on the back of the strong GDP growth (see Table 9). Despite these general improvements, some structural features of unemployment remain unchanged or have even deteriorated. Regional disparities in the NMS are still widening and interregional mobility is low. Thus, in a number of countries labour shortages in some regions or branches co-exist with high unemployment in other regions. In the NMS, labour shortages occurred much earlier than might have been expected after years of almost jobless growth and high unemployment. High unemployment had persisted for a long period of time, resulting in a large proportion of long-term unemployed, who in principle are unemployable as their skills have eroded, they lack any motivation to work and their level of education is low. Table 9 Employment, LFS definition, annual averages 2006 2004 2005 2006 2006 in 1000 persons change in % against preceding year Index 2000=100 Czech Republic 4828 -0.2 1.6 1.3 103.1 Hungary 3930 -0.5 0.0 0.7 102.6 Austria 3928 -1.3 2.2 2.7 105.9 Slovakia 2302 0.3 2.2 3.9 109.5 CENTROPE 14334 -0.5 1.4 1.9 104.7 countries EU 25 201555 0.7 1.8 1.7 106.7 Source: Eurostat Lack of skilled labour is reported for most countries, not only in the automotive industry in the Czech Republic and Slovakia in particular, but also in segments of the high-skill service sector such as health-care personnel, architects, civil engineers and IT experts. These developments may also be
  26. 26. CENTROPE Business and Labour Report, No. 0, 2007 26 partly attributed to the large inflow of FDI. In attracting skilled workers from abroad to fill the vacancies, the Czech Ministry of Labour and Social Affairs already launched a programme entitled ‘Selecting qualified workers from abroad’ as far back as 2003, offering permanent residence permits to those who had lived and worked in the country for two and a half years. The increasing demand for labour also puts pressure on wages. Available data point to an increase in the wage bill in industry in Slovakia and the Czech Republic, where only recently workers at the Skoda car plant went on strike for higher pay. An analysis of labour market developments with respect to different skill types (see Table 10) shows that CENTROPE has a supply structure, which differs from that of the EU 25: the CENTROPE countries have a significantly smaller proportion of people with low levels of education as well as a lower proportion of people with the highest levels of education. Table 10 Educational structure of working-age population, 15-64, 2000 and 2006 low skill medium skill high skill 2000 2006 2000 2006 2000 2006 Austria 28.3 24.8 59.4 60.4 12.3 14.8 Czech Republic 19.6 16.4 70.9 72.2 9.5 11.4 Hungary 33.3 27.2 55.2 57.8 11.5 15.0 Slovakia 22.1 18.9 69.7 69.2 8.2 11.9 CENTROPE 26.1 21.9 63.4 64.7 10.5 13.4 countries EU 25 38.1 33.5 44.3 45.9 17.6 20.6 Source: Eurostat Table 11 Employment rates, 15-64, 2000 and 2006, by skills total low medium high 2000 2006 2000 2006 2000 2006 2000 2006 Austria 67.9 70.2 47.8 49.6 73.7 74.8 85.8 85.5 Czech Republic 64.9 65.3 29.1 23.2 72.8 71.9 85.1 83.9 Hungary 55.9 57.3 29.1 27.6 66.7 65.1 82.0 81.2 Slovakia 56.3 59.4 17.5 14.5 65.2 67.5 84.9 83.9 EU 25 62.4 64.7 48.9 48.5 68.5 69.5 82.5 83.2 Source: Eurostat

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