Identifier
Created
Classification
Origin
05VIENNA2349
2005-07-13 11:53:00
UNCLASSIFIED
Embassy Vienna
Cable title:  

DOWNWARD REVISION FOR AUSTRIA'S 2005/2006 GROWTH

Tags:  ECON EFIN ELAB AU EUN 
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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
-------
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