US embassy cable - 05VIENNA2349

UNCLAS SECTION 01 OF 02 VIENNA 002349 
 
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: DOWNWARD REVISION FOR AUSTRIA'S 2005/2006 GROWTH 
OUTLOOK 
 
REFS:  A) VIENNA 2126; B) VIENNA 1097 
 
 
Summary 
------- 
1.  Austria's two leading economic institutes have 
lowered economic growth forecasts for 2005 to 1.8-1.9%, 
and for 2006 to 1.9-2.3%.  The institutes stress again 
that these figures represent upper limits.  The recovery 
remains export-driven, but there is a possibility that 
investment and private consumption will pick up in late 
2005.  The global economic outlook, the German recovery, 
the recovery of Europe's internal demand, oil prices and 
the Euro-dollar exchange rate represent downward risks 
for the 2005/2006 forecasts.  The unemployment rate 
should rise to 4.6% in 2005 and remain at 4.5-4.6% in 
2006.  Inflation should edge up to 2.5% in 2005, but ease 
to below 2% in 2006.  End Summary. 
 
 
Growth Rates for 2005 and 2006 Revised Downwards 
--------------------------------------------- --- 
2.  The Austrian Institute for Economic Research (WIFO) 
and the Institute for Advanced Studies (IHS) recently 
presented revised projections for 2005 and 2006.  The new 
figures represent downward changes from previous 
prognoses (ref B).  WIFO reduced 2005 growth estimates 
from 2.2% to 1.8% and IHS lowered its estimate to 1.9% 
from 2.1%.  Projections for 2006 are now 1.9-2.3%.  WIFO 
Director Karl Aiginger noted that the recovery slowed in 
the first half of 2005, but the forecasts include 
projections for faster growth in the second half of 2005. 
The situation for 2006 is similar, but with greater 
uncertainties.  IHS Director Bernhard Felderer admitted 
that the IHS's slightly more optimistic outlook is partly 
contingent on increased growth predictions for Germany. 
Both institutes look for private consumption to pick up 
in the second half of 2005, as well as investment 
spending.  WIFO and IHS expect the savings rate to rise 
from 8.9% of disposable incomes in 2004 to 9.3-9.5% in 
2005/2006. 
 
 
Risks - Exchange Rates, Oil Prices 
---------------------------------- 
3.  Aiginger and Felderer maintained that Europe's 
continued anemic internal demand, oil prices and the Euro- 
dollar exchange rate represented downward risks for the 
institutes' forecasts.  An additional risk is the current 
slowdown in global economic growth, especially the 
expected end of the U.S. industrial cycle.  According to 
Felderer, an oil price increase of $10-15 would reduce 
economic growth by 0.2 percentage points, and a 10% 
increase in the Euro exchange rate would reduce growth by 
0.4-1.0 points. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
4.  The institutes based their 2005/2006 forecasts on the 
following assumptions: 
-- U.S. economic growth of 3.3-3.8% in 2005 and 3.0-3.1% 
in 2006; 
-- Euro area growth of 1.5% in 2005 and 1.7-2.0% in 2006; 
-- EU-25 growth of 1.6-1.8% in 2005 and 1.8-2.3% in 2006; 
-- German growth of 1.0-1.2% in 2005 and 1.3-1.5% in 
2006; 
-- oil prices of $50 per barrel in 2005 and $47 in 2006; 
and 
-- dollar/Euro exchange rates of 0.80 in 2005 and 0.80- 
0.85 in 2006. 
 
 
Bank Forecasts Modest Growth 
---------------------------- 
5.  The Austrian National Bank's (ANB) spring forecast of 
June 2005 projects economic growth of 2.0% in 2005, 2.2% 
in 2006 and in 2007, and unemployment rates of 4.5%, 4.4% 
and 4.3%, respectively.  Bank Austria Creditanstalt (BA- 
CA), Austria's largest commercial bank, also recently 
revised its growth projection for 2005 downward to 1.5% 
from 1.7% because of sluggish domestic demand and a 
weakening global economy since mid-2004.  For 2006, BA-CA 
expects growth of 2.0%. 
Inflation Edging Up, Unemployment - A Persistent Problem 
--------------------------------------------- ----------- 
6.  Inflation should rise 2.4-2.5% in 2005, the highest 
rate since 2001, due to price increases in housing, 
tobacco, energy and health services.  If oil prices 
stabilize, inflation could ease below 2% in 2006. 
 
7.  Austria is projected to enjoy higher economic growth 
rates than the Euro-area in 2005/2006, but growth will 
still be insufficient to improve the unemployment 
situation.  Under the lower WIFO assumption, economic 
growth will create 27,000 jobs in 2005 and another 20,000 
in 2006 and lead to new record employment levels (even 
though many new jobs will only be part-time jobs). 
However, the unemployment rate will rise to 4.6% in both 
years.  IHS projects a marginal reduction of the 
unemployment rate to 4.5% in 2006.  According to 
Felderer, growth of 2.5-2.7% would have a significant 
impact on the unemployment rate, but economists do not 
foresee such growth in the near-term (ref A).  Labor 
supply will continue to exceed demand because of 
additional work permits for foreign labor, a continued 
influx of foreign labor from the EU-15, rising numbers of 
illegal works from Central and Eastern Europe, and 
pension reform, which raised the retirement age. 
 
 
Comment 
------- 
8.  The latest projections follow a pattern of revising 
downward growth estimates.  The principal impediment to 
growth remains anemic consumer spending.  Private 
household outlays remain sluggish due to uncertainty 
about the rising unemployment rate, increased competition 
from immigration, the effects of pension cuts, and an on- 
going health care reform.  Efforts to reduce the 
unemployment rate will remain the primary economic policy 
objective for the GoA. 
 
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                  1.8      1.9        1.9      2.3 
Manufacturing        3.0      n/a        3.4      n/a 
Private consumption  1.5      1.9        1.8      2.1 
Public consumption   0.3      0.4        0.0      0.4 
Investment           1.8      2.3        2.7      3.0 
Exports of goods     4.2      5.5        5.5      7.0 
Imports of goods     2.6      5.1        5.0      6.0 
 
Nominal Euro billion 
equivalents: 
GDP                244.6    244.6      253.8    254.7 
 
Other indices: 
GDP deflator         2.1      2.0        1.8      1.8 
Consumer prices      2.5      2.4        1.9      1.7 
Unemployment rate    4.6      4.6        4.6      4.5 
Current account (in 
    percent of GDP)  0.6     -0.2        0.6      0.1 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.80     0.80       0.85     0.80 
 
BROWN