Identifier
Created
Classification
Origin
07VIENNA979
2007-04-16 07:06:00
UNCLASSIFIED
Embassy Vienna
Cable title:  

AUSTRIA'S ECONOMY: STRONGER GROWTH IN 2007/2008

Tags:  ECON EFIN ELAB PGOV AU 
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VZCZCXRO6308
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #0979/01 1060706
ZNR UUUUU ZZH
R 160706Z APR 07
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 7006
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
UNCLAS SECTION 01 OF 02 VIENNA 000979 

SIPDIS

SIPDIS

TREASURY FOR OASIA/ICB/VIMAL ATUKORALA
TREASURY PLEASE ALSO PASS TO OCC/EILEEN SIEGEL AND FEDERAL RESERVE
USDOC FOR 4212/MAC/EUR/OWE/PDACHER
USDOC PLEASE PASS TO OITA
PARIS ALSO FOR USOECD

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV AU
SUBJECT: AUSTRIA'S ECONOMY: STRONGER GROWTH IN 2007/2008

REFS: A) VIENNA 0088 B) 06 VIENNA 3591

Summary
-------

UNCLAS SECTION 01 OF 02 VIENNA 000979

SIPDIS

SIPDIS

TREASURY FOR OASIA/ICB/VIMAL ATUKORALA
TREASURY PLEASE ALSO PASS TO OCC/EILEEN SIEGEL AND FEDERAL RESERVE
USDOC FOR 4212/MAC/EUR/OWE/PDACHER
USDOC PLEASE PASS TO OITA
PARIS ALSO FOR USOECD

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV AU
SUBJECT: AUSTRIA'S ECONOMY: STRONGER GROWTH IN 2007/2008

REFS: A) VIENNA 0088 B) 06 VIENNA 3591

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


1. Austria's two leading economic institutes recently revised GDP
growth forecasts upward for 2007 and 2008. Following 3.2% growth in
2006, latest estimates are for growth of 3.0% in 2007 and 2.4-2.6%
in 2008. Strong exports, a robust investment cycle and improving
private consumption are propelling growth. Austria's unemployment
rate should drop to 4.2-4.5% in 2007 from 4.8% in 2006, but the rate
will probably remain stagnant through 2011 due to lower economic
growth. Inflation remains low at 1.6-1.8% in 2007-2008. The GoA
revised the 2006 consolidated public budget deficit down to 1.1%.
However, economists cautioned that a budget deficit of more than
1.0% is too high, given that Austria is at the peak of a growth
cycle. Both economic institutes called on the GoA to implement
additional structural reforms and to resist spending additional tax
windfalls. End Summary.


Dynamic Growth For 2007 and 2008
--------------


2. The Austrian Institute for Economic Research (WIFO) and the
Institute for Advanced Studies (IHS) recently presented their
projections for 2007 and 2008. After a stronger than expected
growth rate of 3.2% in 2006, both institutes have revised their 2007
growth forecasts upward to 3.0% (WIFO) and 2.9% (IHS) in 2007. The
primary reasons driving the revised outlook include continued strong
economic fundamentals; optimistic expectations from Austrian
business; strong growth in the Euro area; and dynamic growth
opportunities in new EU member states and other important export
markets in Eastern and Southeastern Europe. Industry, the
construction sector and banks should particularly benefit from
strong growth in 2007. With growth of 3.0% or more in both 2006 and
2007, Austria's economy is, however, most likely at the peak of its
current cycle.


3. Projections for 2008 are for slightly lower growth of 2.4-2.6%

due to the expected slowdown in Europe, a weaker U.S. economy, and
slower growth in China. In both 2007 and 2008, growth in Austria
should again be higher than the Euro area average, as it has been
over the last five years. In both years, strong exports, a robust
investment cycle and continued improving private consumption will
contribute to growth. The savings rate will remain approximately 9%
of disposable income in both years.


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


4. The institutes based their revised 2007/2008 forecasts on the
following assumptions:
-- U.S. economic growth of 2.0-2.5% in 2007 and 2.3-3.0% in 2008;
-- Euro area growth of 2.5-2.7% in 2007 and 2.2-2.3% in 2008;
-- EU-27 growth of 2.8-2.9% in 2007 and 2.4-2.5% in 2008;
-- German growth of 2.3-2.5% in 2007 and 2.0-2.3% in 2008;
-- oil prices of $61-64 per barrel in 2007 and $62-64 in 2008; and
-- dollar/Euro exchange rates of 0.75-0.77 in 2007 and 0.71-0.77 in

2008.


5. Parallel to the improved economic outlook, the risks associated
with the forecasts have also risen, particularly the expected
weakening of the U.S. economy. The forecasts assume a soft landing
and only a temporary weakening. A stronger than expected downturn
in the U.S. economy, likely accompanied by a further strengthening
of the Euro, would dampen Austria's growth prospects.


Unemployment Down, But No Further Improvements
-------------- -


6. Robust economic growth will have a noticeable impact on the
labor market in 2007. After the creation of 50,000-60,000 jobs in
2006, a 3.0% growth rate in 2007 should spur continued strong
employment growth. However, since Austria's labor supply will also
show strong growth, the number of unemployed will drop by only
19,000-23,000 in 2007. The unemployment rate will ease to 4.2-4.5%
from 4.8% in 2006. Due to expected lower growth in 2008, economists
do not expect further labor market improvements. The unemployment
rate will remain at 4.1-4.4% in 2008. Mid-term forecasts indicate
that the unemployment rate will remain at that level until 2011.


VIENNA 00000979 002 OF 002



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


7. Inflation will remain at 1.6-1.8% in 2007/08. Moderate wage
increases have helped keep inflation low. Slow growth in private
consumption will also exert a dampening effect on prices.


Deficit Down, But Should Be Better
--------------


8. Strong growth has produced higher than expected tax revenues,
particularly higher corporate tax and VAT revenues. The 2006 total
public sector deficit has been revised downward to 1.1% instead of
the budgeted 1.7%. For 2007, the GoA has budgeted for a total
public sector deficit of 0.9% of GDP (federal government -1.3%,
state and local governments +0.4%),and a 2008 deficit of 0.7%
(federal government -1.2%, state and local governments +0.5%). WIFO
and IHS noted that a deficit of 1.0% or more is too high, given that
Austria is at the peak of a robust growth cycle. Both institutes
called for further structural reforms and to resist spending the
additional tax windfalls (ref B).



9. Statistical Annex


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

WIFO IHS WIFO IHS
project. project. project. project.
2007 2007 2008 2008
Real terms:
GDP 3.0 2.9 2.4 2.6
Manufacturing 6.0 n/a 3.3 n/a
Private consumption 2.2 2.4 2.0 2.1
Public consumption 1.7 1.0 1.6 1.0
Investment 5.5 4.8 3.4 3.8
Exports of goods 8.3 9.1 7.0 8.3
Imports of goods 8.5 8.5 6.5 7.5

Nominal Euro billion
equivalents:
GDP 268.7 268.6 280.0 279.9

Other indices:
GDP deflator 1.8 1.8 1.7 1.5
Consumer prices 1.7 1.6 1.8 1.6
Unemployment rate 4.2 4.5 4.1 4.4
Current account (in
percent of GDP) 2.2 n/a 2.3 n/a
Exchange rate for
US$ 1.00 in Euro
0.75 0.77 0.71 0.77

KILNER