US embassy cable - 05VIENNA3495

UNCLAS SECTION 01 OF 02 VIENNA 003495 
 
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 2005/2006 GROWTH OUTLOOK REVISED 
 
DOWNWARD 
 
REFS:  A) VIENNA 2349; B) VIENNA 2786; C) 04 VIENNA 0273 
 
Summary 
 
------- 
 
1.  Austria's two leading economic institutes again have 
 
lowered economic growth forecasts for 2005 slightly to 
 
1.7-1.8%, and for 2006 to 1.8-2.1%.  High energy prices 
 
necessitated the modest downward revision.  The Austrian 
 
economy remains dependent on exports, as consumer 
 
spending and domestic investments remain sluggish, with 
 
some improvement forecast in 2006.  Higher oil prices 
 
remain a major risk for the 2005/2006 forecasts.  The 
 
unemployment rate should rise to 5.1% in 2005 and 2006. 
 
Inflation should edge up to 2.4% in 2005, but ease to 
 
around 2% in 2006.  End Summary. 
 
Growth Rates for 2005 and 2006 Again 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 modest downward changes from previous 
 
prognoses (ref A), because of the negative effects of 
 
high energy costs.  WIFO reduced its 2005 growth estimate 
 
from 1.8% to 1.7% and IHS lowered its estimate to 1.8% 
 
from 1.9%.  Projections for 2006 are now 1.8-2.1%. 
 
Exports continue to drive economic growth, while domestic 
 
consumption remains sluggish.  Rising unemployment, a 
 
savings rate of 8.7-9.0%, and higher bills for gasoline 
 
and heating have dampened consumer spending noticeably. 
 
Weak consumer spending is also holding back business 
 
investment. 
 
Higher Oil Prices Complicate Forecast 
 
------------------------------------- 
 
3.  Traditionally, a $10 oil price increase leads to a 
 
0.2% decline in growth.  IHS Director Bernard Felderer 
 
noted that the impact on growth is less severe now 
 
because of the slightly better Euro-dollar exchange rate 
 
and Austria's improved competitiveness, both of which 
 
stimulate exports.  Aiginger added that the government's 
 
economic stimulus measures since May (ref B) have offset 
 
0.1 percentage point of the lost growth.  However, the 
 
high oil price -- in June the institutes had assumed $47- 
 
50 per barrel in 2005/06 and now they expect $56-62 -- 
 
remains the main risk for the forecasts. 
 
Assumptions for Growth Forecasts 
 
-------------------------------- 
 
4.  The institutes based their 2005/2006 forecasts on the 
 
following assumptions: 
 
-- U.S. economic growth of 3.3% in 2005 and 3.0-3.3% in 
 
2006; 
 
-- Euro area growth of 1.3% in 2005 and 1.4-1.8% in 2006; 
 
-- EU-25 growth of 1.5% in 2005 and 1.6-2.0% in 2006; 
 
-- German growth of 0.8-1.0% in 2005 and 1.1-1.3% in 
 
2006; 
 
-- oil prices of $56-58 per barrel in 2005 and $62 in 
 
2006; and 
 
-- dollar/Euro exchange rates of 0.80 in 2005 and 0.81- 
 
0.83 in 2006. 
 
Other Forecasts 
 
--------------- 
 
5.  The results of the WIFO and IHS forecasts track with 
 
those of other institutions.  The IMF's World Economic 
 
Outlook from September 2005 projects economic growth of 
 
1.9% in 2005 and 2.2% in 2006 for Austria.  Bank Austria 
 
Creditanstalt (BA-CA), Austria's largest commercial bank, 
 
is more pessimistic: in a revised forecast, BA-CA 
 
maintained a 1.5% growth forecast for 2005, but revised 
 
downward its 2006 outlook to 1.8% from 2.0%. 
 
Inflation Edging Up, Unemployment A Persistent Problem 
 
--------------------------------------------- --------- 
 
6.  Inflation should rise to 2.4% 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 to 2% in 2006. 
 
7.  Per capita gross wages will increase 2.7% in 2005 and 
 
2.9% in 2006.  However, due to hourly productivity growth 
 
of more than 4% in industry in 2005 and 2006, unit labor 
 
costs will drop about 1% in both years, helping to 
 
improve Austria's international competitiveness. 
 
8.  Both Aiginger and Felderer referred to rising 
 
unemployment as Austria's biggest economic challenge. 
 
Since 2000, the labor supply has increased by 160,000, 
 
while labor demand has increased by only 100,000, 
 
according to Aiginger.  Despite continued substantial 
 
employment growth (0.9% in 2005), the unemployment rate 
 
will rise to 5.1% in 2005 and remain at that level in 
 
2006.  Even though Austria should enjoy higher economic 
 
growth than the Euro-area in 2005/2006, growth rates are 
 
considerably below the 2.5% rate necessary for palpable 
 
improvement of the unemployment situation.  A new 
 
phenomenon is also aggravating the unemployment figures: 
 
evermore Germans are seeking work in Austria. 
 
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                  1.7      1.8        1.8      2.1 
 
Manufacturing        2.7      n/a        3.0      n/a 
 
Private consumption  1.4      1.7        1.7      1.9 
 
Public consumption   0.6      0.8        0.0      0.8 
 
Investment           0.4      2.4        2.1      3.2 
 
Exports of goods     4.2      5.8        5.2      6.8 
 
Imports of goods     1.7      5.1        4.1      6.6 
 
Nominal Euro billion 
 
equivalents: 
 
GDP                245.3    245.7      254.3    255.0 
 
Other indices: 
 
GDP deflator         1.8      1.8        1.8      1.7 
 
Consumer prices      2.4      2.4        2.1      1.9 
 
Unemployment rate    5.1      5.1        5.1      5.1 
 
Current account (in 
 
    percent of GDP)  0.5      0.1        0.4      0.1 
 
Exchange rate for 
 
    US$ 1.00 in Euro 
 
                    0.80     0.80       0.83     0.81 
 
VAN VOORST