Strong output gains in manufacturing are gradually extending from basic and intermediate towards finished goods. With aggregate demand in continental Europe rebounding, net exports have risen markedly since mid-year thereby preventing a further rise in the trade deficit. However, the surplus in foreign tourism services declined as higher spending by Austrians abroad was accompanied by a fall in foreign demand. The international business cycle recovery has so far proved rather stronger than expected and is providing major stimulus to activity in Austria. Exports to North America and South East Asia are rising at double-digit annual rates, those to eastern and western Europe are gaining momentum, with the exception of sales to Germany which have recently slowed down. In all, merchandise exports rose by 7.4 percent year-on-year in July and by 4.7 percent in August. With exports outpacing imports (July +4 and August +2.5 percent), the speedy recovery in Europe is benefiting the Austrian trade balance, keeping the deficit slightly below the level a year ago. However, the net surplus in tourism services continues to fall as exchange rate changes and cheap air fares encourage foreign travel by Austrians while at the same time dampening foreign demand. Industrial activity strengthened further during the summer, with output in the first eight months rising 4 percent over the level a year ago. Substantial gains are no longer confined to basic and intermediate goods but also concern investment manufactures and consumer durables. Order figures suggest further advances over the coming months. Following the boom early in the year, construction activity has returned to a more sustainable pace, with residential building remaining the most buoyant component. Despite household disposable incomes being boosted by tax cuts, retail sales are picking up only gradually as demand is held back by the expectation of price cuts in the context of accession to the European Union. Inflation is receding slowly, with the CPI still rising at annual rates of above 3 percent in August and September. Rents and other housing costs as well as service prices show the highest increases, cuts in regulated food prices are offset by seasonal hikes. Prices of manufactures show no sign of decelerating, despite falling unit labor costs and stable import prices, as both the pick-up in private demand and a low degree of competition in the retail sector favor a widening in profit margins. The labor market is reacting relatively quickly to the recovery of demand and output. Despite substantial efforts being made to raise productivity, employment in manufacturing has almost stopped falling and many service branches are hiring personnel. The seasonally adjusted unemployment rate, according to national definitions, was 6.4 percent in October.