AUSTRIA'S ECONOMY POISED FOR FASTER GROWTH

UNCLAS VIENNA 003043

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 ECONOMY POISED FOR FASTER GROWTH

REF: VIENNA 2030

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


1. Austrian economic institutes have revised 2006 and 2007 GDP
forecasts upward to 3.1% and 2.3-2.5% respectively. Data for the
first half of 2006 indicate continued robust growth of exports and
investments, and some improvement in private consumption. Growth in
2007 should slow, as the negative impact from the German VAT
increase takes hold. The 2006 growth rate will be the highest since
2000 and 0.5% higher than forecasts for the Euro area. The
unemployment rate should decline slightly, but remains sticky at
4.8-5.0% due to an increasing labor supply. Inflation remains low
at 1.6-1.7% despite higher oil prices. The institutes criticized
the total public sector deficit of 1.7% of GDP in 2006 as too high
for the current economic cycle. End Summary.


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


2. The Austrian Institute for Economic Research (WIFO) and the
Institute for Advanced Studies (IHS) recently presented revised
economic projections for 2006 and 2007 from their June 2006
estimates. Most notably, both institutes revised their 2006 GDP
estimates upward to 3.1%. Projections for 2007 are for slightly
lower growth, but both institutes are now predicting higher growth
rates -- 2.3% (IHS) and 2.5% (WIFO) - than they predicted in June.
The 2006 growth rate will be the highest since 2000, and will be
half a percentage point higher than that of the Euro area and the
EU-25. Strong global demand continues to boost Austria's exports.
Solid investment growth and improving private consumption will
continue in 2007 and partially offset the anticipated negative
impact from the German VAT increase. According to WIFO Director
Karl Aiginger and IHS Director Bernhard Felderer, slower growth in
2007 does not portend an economic downturn.


3. In real terms, exports of goods are benefiting from a strong
international economic environment and Austria's improved
international competitiveness. Exports of goods should grow by
around 10.0% in 2006 and another 7.0-8.0% in 2007. Investments
should register an increase of approximately 5.0% in 2006 and 4.0%
in 2007. Private consumption will only rise by around 2.0% in 2006
and 2007. Aiginger and Felderer point to any mild slowdown in the
U.S. economy as the only factor potentially negatively affecting the
2006/2007 forecast.


Unemployment Starting to Decline, But Still Sticky
-------------- --------------


4. Solid economic growth is beginning to have a positive effect on
the labor market, despite an increasing labor supply. Robust growth
should add 50,000 jobs in 2006 and 43,000 in 2007. The 1.5% and
1.2% employment growth in 2006 and 2007 will be the highest since
the early 1990s. Concurrently, the number of unemployed has started
to decline slightly, by about 11,000 in 2006. However, labor supply
should grow by about 40,000 in both years, causing the unemployment
rate to remain sticky at 4.8-5.0%. The unemployment rate is
unlikely to drop significantly in the near-term, thus remaining a
major challenge for a new GoA.


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


5. The institutes based their revised 2006/2007 forecasts on the
following assumptions:
-- U.S. economic growth of 3.3% in 2006 and 2.5-2.8% in 2007;
-- Euro area growth of 2.5-2.6% in 2006 and 2.0-2.3% in 2007;
-- EU-25 growth of 2.5-2.7% in 2006 and 2.0-2.4% in 2007;
-- German growth of 2.3-2.4% in 2006 and 1.5-1.7% in 2007;
-- oil prices of $65-68 per barrel in 2006 and $65-70 in 2007; and
-- dollar/Euro exchange rates of 0.80 in 2006 and 0.78-0.80 in 2007.



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


6. Inflation should remain low in 2006 and 2007 at 1.6-1.7%, with
little impact from higher oil prices. Due to the relatively high
unemployment rate, economists do not expect significant inflationary
effects from higher wage demands. Increasing imports of industrial
goods from emerging countries continue to dampen inflationary
pressures.

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


7. WIFO and IHS project the 2006 total public sector deficit to be
1.7-1.8% of GDP, slightly higher than the 2005 deficit of 1.5%. The
primary factor driving the higher deficit is that cost-savings from
administrative reform will not offset the continued impact of the
2005 tax cut and higher expenses in specific areas, such as civil
service wage increases, R&D spending and SME promotion. Aiginger
and Felderer both cautioned that a deficit of 1.7% is too high for
the current economic cycle, given 3.1% growth. Both institutes
implied it would be difficult for the GoA to achieve its goals of a
0.8% deficit in 2007 and a balanced budget in 2008.


8. Statistical Annex


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

WIFO IHS WIFO IHS
project. project. project. project.
2006 2006 2007 2007
Real terms:
GDP 3.1 3.1 2.5 2.3
Manufacturing 6.7 n/a 5.0 n/a
Private consumption 1.9 2.2 2.1 1.9
Public consumption 1.7 1.1 1.5 0.5
Investment 5.0 5.3 4.0 3.6
Exports of goods 10.1 9.7 6.8 7.8
Imports of goods 8.0 7.8 7.0 7.6

Nominal Euro billion
equivalents:
GDP 256.6 256.0 267.5 266.0

Other indices:
GDP deflator 1.6 1.3 1.7 1.6
Consumer prices 1.6 1.6 1.7 1.6
Unemployment rate 5.0 4.9 5.0 4.8
Current account (in
percent of GDP) 1.3 n/a 1.2 n/a
Exchange rate for
US$ 1.00 in Euro
0.80 0.80 0.80 0.78

MCCAW