US embassy cable - 05VIENNA1097

UNCLAS SECTION 01 OF 02 VIENNA 001097 
 
SIPDIS 
 
PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY ALSO FOR OCC/EILEEN SIEGEL 
TREASURY ALSO PASS FEDERAL RESERVE 
USDOC PASS TO OITA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
PARIS ALSO FOR USOECD 
FRANKFURT FOR TREASURY 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, AU, EUN 
SUBJECT: AUSTRIA'S 2005/06 GROWTH OUTLOOK - STILL LEAN 
 
REF:  VIENNA 45 
 
SUMMARY 
------- 
1.  The two leading Austrian economic institutes now 
forecast real GDP growth of up to 2.1-2.2% in 2005 and 
2.3-2.5% in 2006.  The institutes stress that these 
figures represent upper limits.  The recovery is still 
export-driven, as investment and private consumption 
remain weak.  The continued strength of the world 
economy, the recovery of Europe's internal demand, oil 
prices and the Euro-dollar exchange rate represent 
downward risks for the 2005/06 forecasts.  The GoA's 
income and corporate tax cuts now have an anti-cyclical 
effect.  Economic growth in 2005/06 will be insufficient 
for an improvement in the labor market.  The unemployment 
rate will remain at 4.5%.  Inflation will edge up to 2.2- 
2.5% in 2005 and ease to 1.7-1.8% in 2006.  END SUMMARY. 
 
 
2005 AND 2006 - CONTINUED MODERATE GROWTH 
----------------------------------------- 
2.  On April 1, the Austrian Institute for Economic 
Research (WIFO) and Institute for Advanced Studies (IHS) 
presented their revised projections for 2005 and 2006. 
The new figures represent very little change from their 
earlier prognosis (reftel).  For 2005, WIFO maintained 
its growth expectation of 2.2%, while IHS reduced its by 
0.2 points to 2.1%, assuming considerably higher 
petroleum prices.  2006 growth projections are now 2.3- 
2.5%.  New WIFO Director Karl Aiginger noted that the 
forecasts are optimistic and represent the upper limits 
of possible growth.  The Austrian economy is gaining 
momentum, according to Aiginger, but temporary weakness 
in the fourth quarter of 2004 has had some spill over 
effects in early 2005.  Aiginger referred to the Austrian 
economy as being on a "bumpy upward trend."  IHS director 
Bernhard Felderer stated that, in retrospect, the GoA's 
decision to cut 2005 income and corporate taxes proved 
correct, because the tax cuts now have an anti-cyclical 
effect.  Both economists stated that the upswing was 
mainly export driven.  Investment has not yet benefited 
from the export boom.  Instead, it has weakened as 
private consumption remains weak, and the positive 
benefits from the 2003 and 2004 investment premium have 
receded.  Investment should pick up somewhat in 2006, 
while private consumption growth will remain moderate. 
WIFO and IHS expect the savings rate to rise from 9.2% of 
disposable incomes in 2004 to 9.6% in 2005/2006. 
 
 
RECAPPING 2004 
-------------- 
3.  In 2004, the Austrian economy grew 2.0% in real terms 
and 3.9% in nominal terms.  Seasonally adjusted 
quarter/quarter growth rates (real terms) throughout 2004 
were 0.6, 0.8, 0.8, and 0.3%.  In nominal terms, 
Austria's 2004 GDP was Euro 235.1 billion (USD 292.2 
billion), per capita GDP was Euro 28,890 (USD 35,820). 
Consumer price inflation was 2.1% and the unemployment 
rate was 4.5%. 
 
 
RISKS - EXCHANGE RATES, OIL PRICES, ETC. 
---------------------------------------- 
4.  Aiginger and Felderer presented a list of downward 
risks for the forecasts.  Since Austria's economy is 
still primarily export driven, a major risk is the 
continued strength of the world economy, particularly of 
the U.S. and Asia.  Another risk factor includes Europe's 
continued anemic internal demand.  Oil prices and the 
Euro-dollar exchange rate are additional risks. 
 
 
ASSUMPTIONS FOR GROWTH FORECASTS 
-------------------------------- 
5.  The institutes based their 2005/2006 forecasts on the 
following assumptions: 
-- U.S. economic growth of 3.3-3.8% in 2005 and 3.1-3.3% 
in 2006; 
-- Euro area growth of 1.7-1.8% in 2005 and 2.2-2.3% in 
2006; 
-- EU-25 growth of 2.0% in 2005 and 2.3% in 2006; 
-- German growth of 1.2-1.3% in 2005 and 1.8% in 2006; 
-- oil prices of USD 44-47 per barrel in 2005 and USD 39- 
47 in 2006; and 
-- dollar/Euro exchange rates of 0.75 in 2005 and 0.75- 
0.78 in 2006. 
 
 
INFLATION TO TICK UP, UNEMPLOYMENT RATE STICKY 
--------------------------------------------- - 
6.  Inflation should edge upwards in 2005.  Due to 
substantial increases in energy prices, housing costs and 
food prices, inflation over the past several months has 
increased to just below 3%, but should level off later 
this year.  For 2006, the institutes expect inflationary 
pressures to ease to 1.7-1.8%. 
 
7.  Due to the export boom and the tax cut, Austrian 
economic growth is expected to exceed that of the Euro- 
area in both years.  However, any growth of less than 
2.5% is insufficient to improve labor market statistics. 
The unemployment rate will remain at 4.5%.  Labor supply 
will continue to exceed demand because of a continued 
influx of foreign labor (over 10,000 Germans have come to 
Austria to work over the last several months), 
demographic developments, and the GoA's pension reform, 
which introduced a rise in the retirement age.  Thus, 
despite record employment levels and a continued marked 
increase in employment, the unemployment rate in both 
2005 and 2006 will remain at 4.5%. 
 
 
PUBLIC DEFICIT GROWING 
---------------------- 
8.  In 2005, the income tax cut will push the deficit to 
about 2.0% of GDP.  To keep it below the 2%-mark, the GoA 
may have to resort to various one-time revenue-raising 
measures.  However, the main impact of the 2005 corporate 
tax cut will be on the 2006 budget.  With the expected 
stronger economic growth, the GoA should be able keep the 
2006 total public sector deficit at the predicted 1.7%. 
 
 
9.  Statistical Annex 
 
 
                      Austrian Economic Indicators 
                   (percent change from previous year, 
                        unless otherwise stated) 
 
                    WIFO     IHS      WIFO      IHS 
                    project. project. project.  project. 
                    2005     2005     2006      2006 
Real terms: 
GDP                  2.2      2.1        2.3      2.5 
Manufacturing        4.0      n/a        3.7      n/a 
Private consumption  2.0      2.1        2.2      1.9 
Public consumption   0.5      0.2        0.8      0.2 
Investment           1.8      2.3        2.7      3.1 
Exports of goods     6.0      7.6        7.0      7.4 
Imports of goods     6.0      6.8        7.1      6.0 
 
Nominal Euro billion 
equivalents: 
GDP                245.5    244.6      255.0    254.7 
 
Other indices: 
GDP deflator         2.2      1.9        1.6      1.6 
Consumer prices      2.5      2.2        1.8      1.7 
Unemployment rate    4.5      4.5        4.5      4.4 
Current account (in 
    percent of GDP) -0.6     -0.1       -0.0      0.4 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.75     0.76       0.78     0.75 
 
BROWN