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 -------------- ¶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