AUSTRIA'S 2005/06 GROWTH OUTLOOK - STILL LEAN

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