Identifier
Created
Classification
Origin
06VIENNA2030
2006-07-07 10:10:00
UNCLASSIFIED
Embassy Vienna
Cable title:  

AUSTRIA'S 2006/2007 OUTLOOK CONTINUES TO IMPROVE

Tags:  ECON EFIN ELAB EUN AU 
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VZCZCXRO1685
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHVI #2030/01 1881010
ZNR UUUUU ZZH
R 071010Z JUL 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 4161
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
RUEHFR/AMEMBASSY PARIS 0758
UNCLAS SECTION 01 OF 03 VIENNA 002030 

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: AUSTRIA'S 2006/2007 OUTLOOK CONTINUES TO IMPROVE

REF: VIENNA 1152

Summary
-------

UNCLAS SECTION 01 OF 03 VIENNA 002030

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: AUSTRIA'S 2006/2007 OUTLOOK CONTINUES TO IMPROVE

REF: VIENNA 1152

Summary
--------------


1. The Austrian economy exhibits solid growth and more
optimism. Data for the first few months of 2006 show
strong growth of exports and investments, and some
improvement in private consumption. The two leading
Austrian economic institutes have upgraded their 2006
forecasts slightly, predicting real GDP growth of 2.5-
2.6%, with forecasts of growth of 2.1-2.2% in 2007. The
2006 growth rate will be the highest since 2000, and will
be higher than that of the Euro area. The forecasts are
relatively safe against downward revisions. Due to a
strong rise in employment sparked by solid economic
growth and a related decline in the number of unemployed,
the institutes project unemployment rate at 5.0% in 2006
and 5.1% in 2007. Inflation is not a problem. The total
public sector deficit is under control. End Summary.

Solid Growth in 2006 and 2007 - More Optimism
--------------


2. On June 30, the Austrian Institute for Economic
Research (WIFO) and the Institute for Advanced Studies
(IHS) presented their revised projections for 2006 and
2007, relfecting only marginal changes from their March
2006 estimates. For 2006, IHS reaffirmed its 2.5% growth
forecast while, WIFO raised its projection from 2.4% to
2.6%. Projections for 2007 are for slightly lower
growth. WIFO revised its 2009 projection upward to 2.1%,
while HIS kept its projection at 2.2%. The 2006 growth
will be the highest since 2000, and will be half a
percentage point higher than that of the Euro area.
Despite several unfavorable parameters, including high
Euro exchange rate, high oil prices, and rising interest
rates, economists view the outlook as better than before.
Exports and investments will drive economic growth in

2006. Private consumption remains mediocre. In real
terms, goods exports, benefiting from a strong
international economic environment and Austria's improved
international competitiveness, are forecast to grow by

8.0% and investments by 3.5% (Investments grew by 1.6% in
2005 and 0.6% in 2004). Pivate consumption will only rise
by some 2.0% (1.4% in 2005 and 0.8% in 2004). Available
data for the first few months of 2006 support
entrepreneurs' rising optimism. For 2007, the
institutes, as before, expect a slightly lower economic
growth rate, because additional domestic demand is
unlikely to offset less thriving exports resulting from a
little less dynamic world economy and a negative impact
from the German VAT increase. Both WIFO Director Karl
Aiginger and IHS Director Bernhard Felderer stressed that
the lower growth in 2007 will not indicate the start of a
downturn, but just a dent in the upswing. The dynamics
of the Austrian economic recovery will remain unbroken in
2007, but the German VAT increase will affect the
Austrian economy more than that ofother European
countries.

Private Consumption Still Slow
--------------


3. The rising number of people employed Qll lead to a
increase in real total disposable income by about 2.0%
annuQly in both 2006 and 2007. However, on a per capita
basis, real disposable net incomes, despite the income
tax cut, will rise only 0.7% in 2006 and 0.4% in 2007.
Since the savings rate will remain stable at about 9.5%
of disposable incomes, private consumption will grow only
around 2.0% in both years. This is an improvement from
2004 (+0.8%) and 2005 (+1.4%),but private consumption
remains the laggard among demand aggregates.

Unemployment Starting to Decline
--------------


4. The solid economic recovery is now starting to have a
positive effect on the labor market. It has sparked an
additional 40,000 jobs in 2006 and another 34,000 in
2007, most of which are full time jobs. At the same
time, the number of unemployed had started to decline.

VIENNA 00002030 002.2 OF 003


In June 2006, the number of unemployed was the lowest in
three years. However, the projected decline of 11,000 in
the number of unemployed in 2006 is in part due to GoA
job training programs. In 2007, the number of unemployed
could rise again, because the number of people in job
training programs (and therefore not counting as
unemployed) may drop due to lower funding. As a result,
the unemployment rate will be 5.0% in 2006 and 5.1% in

2007. Aiginger attributed the labor market improvement
this year primarily to the GoA's training measures and
said that the GoA will have to confront the labor market
problem for several more years. Felderer said that the
2006 employment growth was the biggest since the early
1990s and that part of Austria's unemployment problem is
a problem of matching the qualifications, of job
searchers with those in demand.

Risks for the Forecasts - Exchange Rates and Oil Prices
-------------- --------------


5. WIFO and IHS are more optimistic than three months
ago and felt that their forecasts are rather safe against
downward revisions. The main risks, according to
Aiginger, are the effects of the German VAT increase, the
oil price, the Euro exchange rate and uncertainty about
the U.S. economy. Felderer saw no problem for the U.S.
economy in 2006 or 2007, but was concerned about longer-
term prospects and about how the U.S. will deal with the
twin deficits and the real estate bubble.

Assumptions for Growth Forecasts
--------------


6. The institutes based their revised 2006/2007
forecasts on the following assumptions:
-- U.S. economic growth of 3.3-3.5% in 2006 and 3.0 in
2007;
-- Euro area growth of 2.0-2.1 in 2006 and 1.8-1.9% in
2007;
-- EU-25 growth of 2.2-2.3% in 2006 and 2.0% in 2007;
-- German growth of 1.9-2.0% in 2006 and 1.2-1.5% in
2007;
-- oil prices of $68 per barrel in 2006 and $68-70 in
2007; and
-- dollar/Euro exchange rates of 0.80 in 2006 and 0.79-
0.80 in 2007.

Inflation No Problem
--------------


7. Inflation is not a problem, and will stay around 1.6-
1.7% in 2006 and 1.6-1.8% in 2007. The oil price
increase has had little effect so far. Due to the
relatively high unemployment rate, economists do not
expect significant secondary effects via higher wage
increases. Increasing imports of cheap industrial goods
have a price dampening effect and contribute to low
inflation.

Public Finance
--------------


8. The 2006 total public sector deficit is projected at
1.7-1.8% of GDP, slightly higher than the 1.5% of GDP
last year. The reason is that cost-savings from
administrative reform will not offset the continued
impact of the tax cut and higher expenses in many areas,
such as for a civil service wage increase, R&D and SMEs.
For 2007, the institutes expect a deficit of 0.8-1.3%.
However, no budget draft is available. The GoA's 2005-
2008 Stability Program foresees a deficit of 0.8% of GDP
in 2007 and a balanced total public sector budget in

2008.



9. Statistical Annex


Austrian Economic Indicators
(percent change from previous year,
unless otherwise stated)

WIFO IHS WIFO IHS

VIENNA 00002030 003 OF 003


project. project. project. project.
2006 2006 2007 2007
Real terms:
GDP 2.6 2.5 2.1 2.2
Manufacturing 5.5 n/a 4.5 n/a
Private consumption 1.9 2.1 2.0 1.8
Public consumption 1.3 1.1 0.5 0.5
Investment 3.6 3.5 3.3 2.9
Exports of goods 8.0 8.5 5.7 7.0
Imports of goods 6.9 8.0 6.0 6.4

Nominal Euro billion
equivalents:
GDP 256.9 256.6 266.8 266.1

Other indices:
GDP deflator 1.8 1.7 1.7 1.5
Consumer prices 1.7 1.6 1.8 1.6
Unemployment rate 5.0 4.9 5.1 4.9
Current account (in
percent of GDP) 1.2 1.4 0.9 1.5
Exchange rate for
US$ 1.00 in Euro
0.80 0.80 0.80 0.79

MCCAW