US embassy cable - 05VIENNA2126

UNCLAS SECTION 01 OF 02 VIENNA 002126 
 
SIPDIS 
 
PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY ALSO FOR OCC/EILEEN SIEGEL 
TREASURY ALSO PASS FEDERAL RESERVE 
SECDEF FOR OSD/ISP/EUR 
USDOC PASS TO OITA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
PARIS FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, AU, EUN 
SUBJECT:  AUSTRIA'S GROWTH FORECAST OPTIMISTIC, BUT 
DOWNSIDE RISKS AND PERSISTENT UNEMPLOYMENT REMAIN 
 
REFS:  A) VIENNA 1097; B) 04 VIENNA 1124; C) 04 VIENNA 
 
0273 
 
 
SUMMARY 
------- 
1.  According to a recent forecast from the Austrian 
Institute for Economic Research (WIFO), the Austrian 
economy should grow at an average annual real rate of 
2.3% during 2005-20009.  WIFO cautioned that further Euro 
appreciation would negatively affect this projection, and 
that sustained growth would depend on increased domestic 
demand, not only on export growth.  Austria will benefit 
from a dynamic global economy, including strong growth in 
China and continued strong demand in neighboring markets 
in Central and Eastern Europe.  The WIFO projections 
would exceed predicted average growth in the Euro area 
and in Germany, but would be insufficient to reduce the 
4.5% unemployment rate.  Unemployment will remain a key 
focus for domestic economic policies.  End Summary. 
 
 
Slightly Stronger Economic Growth Ahead 
--------------------------------------- 
2.  At a projected annual average growth rate of 2.3%, 
Austria's growth over the next five years should outpace 
the 1.6% recorded for the past five years (2000-2004), 
according to the Austrian Institute for Economic 
Research's (WIFO) recently revised mid-term forecast. 
The main stimulus for Austria's growth will remain 
exports.  However, recovery of domestic demand will be 
critical.  WIFO believes strong export performance should 
translate into more investment activity and private 
consumption.  Under these conditions, private consumption 
should grow at an annual average rate of 2.1% during 2005- 
2009, after growth of only 1.4% in 2000-2004.  Rising 
employment, lower inflation and the GoA's 2005 income tax 
cut (ref C) should stimulate private consumption. 
 
 
The International Scenario 
-------------------------- 
3.  WIFO based its 2005-2009 forecasts on the following 
assumptions: 
-- U.S. average economic growth of 3.3%; 
-- EU-25 average economic growth of 2.3%; 
-- Euro area average economic growth of 2.1%; 
-- average economic growth in the new EU-10 of 4.4%; 
-- German average economic growth of 1.5%; 
-- oil prices averaging USD 38 per barrel, with a decline 
from USD 44 per barrel in 2005 to USD 36 in 2008-2009; 
and 
-- an average dollar/Euro exchange rate of 0.81, with an 
improvement from 0.75 in 2005 to 0.87 in 2009. 
 
4.  The forecast assumes continued dynamic developments 
in the world economy, particularly in China, which 
remains a driving force for global economic growth.  WIFO 
predicts growth in the U.S. will weaken slightly because 
of higher interest rates and a more restrictive fiscal 
policy, but will remain higher than in the Euro area. 
Austria will continue to benefit from the dynamic global 
economy because of its favorable international 
competitiveness (a result of high productivity increases 
and moderate wage increases in recent years), strong 
demand in neighboring Central and Eastern European 
markets, and GoA policies promoting a more competitive 
business environment. 
 
 
Risks - Exchange Rates, Oil Prices, Private Consumption 
--------------------------------------------- ---------- 
5.  A major caveat for the forecast is a deterioration of 
international parameters, especially the overvalued Euro. 
WIFO assumes a gradual depreciation of the Euro vis--vis 
the USD.  Any further appreciation of the Euro would 
dampen growth in the entire Euro area.  A permanently 
high oil price would have a similar effect.  In the Euro 
area, there is an additional risk that economic policies 
to overcome weak domestic demand will not be effective. 
Thus, this forecast clearly bears more downside risks, 
according to WIFO. 
 
 
Persistent Unemployment - The Major Issue 
----------------------------------------- 
6.  There will be no turn-around in the labor market. 
The projected average economic growth of 2.3% will 
produce about 30,000 jobs annually (job growth rate of 
0.9%).  However, this will still be insufficient to 
produce a decline in the unemployment rate.  Labor supply 
will keep pace with increasing labor demand, because of 
demographic developments - increased numbers of young 
people entering the labor market, pension reform that 
effectively raised the retirement age, and the continued 
influx of foreign labor.  Thus, Austria's unemployment 
rate will remain at 4.5% throughout the entire 2005-2009 
period. 
 
7.  Michael Landesmann, Research Director of the renowned 
Vienna Institute for International Economic Studies, said 
in a June 20 press interview that Austria would go 
through a structural crisis in the labor market over the 
next several years.  According to Landesmann, the 
situation would be similar to the U.S. experience in the 
1980s, when companies recorded strong profits, but shed 
jobs. 
 
 
Comment 
------- 
8.  WIFO's cautious assumption that economic growth in 
2005-2009 will reach the long-term average of about 2.5% 
may be too optimistic.  Growth in the first quarter of 
2005 (only 0.2% over the fourth quarter of 2004) was 
unexpectedly weak and therefore it is unlikely growth 
will achieve the projected 2005 growth rate of 2.2% (ref 
A).  Stronger projected growth in 2005-2009 clearly 
represents upper limits.  For domestic economic policies, 
the unemployment situation will remain key.  The GoA has 
already downgraded its expectations - its 2002 National 
Action Plan for Employment (NAP) projected an 
unemployment rate of 3.5% for 2002, but the 2004 NAP 
revised the prediction upward to 4.3% for 2005. 
 
9.  WIFO Forecast of Economic Indicators for Austria 
    (average annual percent change, unless 
    otherwise stated) 
 
                              2000/2004    2005/09 
 
Real terms: 
GDP                                 1.6        2.3 
Private consumption                 1.4        2.1 
Public consumption                  0.3        0.4 
Plant and equipment investment      2.1        2.6 
of which: 
   machinery and equipment          3.7        3.5 
   construction                     0.8        1.8 
Domestic demand                     1.0        2.0 
Exports                             6.2        6.4 
Imports                             5.2        6.3 
 
Other indices: 
GDP deflator                        1.6        1.6 
Consumer prices                     1.8        1.7 
Employment growth                   0.3        0.9 
Unemployment rate (in percent)      4.1        4.5 
Per capita payrolls, gross          2.0        2.3 
 
BROWN