AUSTRIA'S 2005/2006 GROWTH OUTLOOK REVISED

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

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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

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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

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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

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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

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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

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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