Identifier
Created
Classification
Origin
08VIENNA1889
2008-12-24 09:05:00
UNCLASSIFIED
Embassy Vienna
Cable title:  

Economic Outlook for Austria - 2009 To Be

Tags:  ECON EFIN EUN AU 
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VZCZCXRO4407
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #1889/01 3590905
ZNR UUUUU ZZH
R 240905Z DEC 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 1782
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
UNCLAS SECTION 01 OF 03 VIENNA 001889 

SIPDIS

TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/ATUKORALA
TREASURY PASS FEDERAL RESERVE, FINCEN, AND SEC/JACOBS
USDOC FOR 4212/MAC/EUR/OWE/PDACHER
PARIS ALSO FOR USOECD

E.O. 12958: N/A
TAGS: ECON EFIN EUN AU
SUBJECT: Economic Outlook for Austria - 2009 To Be
First Recession Year Since 1981

REF: (A) VIENNA 1484; (B) VIENNA 0621

UNCLAS SECTION 01 OF 03 VIENNA 001889

SIPDIS

TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/ATUKORALA
TREASURY PASS FEDERAL RESERVE, FINCEN, AND SEC/JACOBS
USDOC FOR 4212/MAC/EUR/OWE/PDACHER
PARIS ALSO FOR USOECD

E.O. 12958: N/A
TAGS: ECON EFIN EUN AU
SUBJECT: Economic Outlook for Austria - 2009 To Be
First Recession Year Since 1981

REF: (A) VIENNA 1484; (B) VIENNA 0621


1. SUMMAARY: Austria's economy began to weaken in the
second quarter in reaction to the world downturn and is
now in recession. The two leading Austrian economic
institutes downgraded their GDP growth estimates for
2008 to 1.8%; 2009 is expected to be the first full-
year recession since 1981. The economy is projected to
contract by around 0.5% in 2009 due to shrinking
exports and investments, despite modest growth in
private consumption. For 2010, the institutes project
a recovery with growth of 0.9-1.3% but warned of
continued downside risks. Unemployment will rise to
3.9-4.1% in 2009. Inflation will ease from 3.2% in
2008 to 1.2-1.5% in 2009. The budget deficit will
spike from only 0.6% of GDP in 2008 to about 2.8% in
2009 and most likely above 3% in 2010. Bleak as they
are, these forecasts are still more optimistic than
outside (EIU) estimates. END SUMMARY.

Forecasts Rushing to Catch Up with Recession
--------------


2. The Austrian Institute for Economic Research (WIFO)
and the Institute for Advanced Studies (IHS) recently
issued revised growth projections for 2008 and 2009 and
a first outlook for 2010. The financial crisis has
reached Austria's real economy and especially exports,
the driving force behind growth in recent years. The
institutes now peg 2008 growth at 1.8%. Quarter-to-
quarter GDP data show the rapid slide:
2008 Q1: 0.5%
Q2: 0.3%
Q3: 0.1%
Q4: Recession (ongoing)

2009: Austria's First Recession Year Since 1981
-------------- --


3. Three months ago, the institutes still projected
growth of 0.9-1.2% for 2009: now they say with virtual
certain that Austria will have its first full-year
recession since 1981 (it had a two-quarter mini-
recession in 1992/1993). The economy is projected to
shrink around 0.5% in 2009, with the first two quarters
being the worst. Stabilization but no growth is
expected for the latter part of the year. Exports, so
far the drivers of the Austrian economic growth are
projected to decline in 2009, as will investment.

Private consumption will grow slightly (not enough to
offset other negative GDP components) based on over 3%
growth in after-tax incomes (negotiated wage increases,
declining inflation and a planned 2009 tax cut). At
the same time, the savings rate will increase from
11.8% of disposable income in 2008 to 13.1% in both
2009 and 2010. GOA fiscal stimulus (infrastructure
projects, measures to stimulate investments, credit
guarantees and subsidized loans for SMEs, etc.) will
help make the recession is Austria less severe than in
the Euro-zone (minus 1.2%). Inflation is no longer a
problem.

Modest Recovery in 2010?
--------------


4. For 2010, the institutes expect modest growth of
0.9-1.3%, due in part to medium-term impact of fiscal
stimulus. Exports are expected to recover somewhat,
investment will grow slightly, and private consumption
will continue to be a stabilizing element.

Other Forecasts and Risks Involved
--------------


5. This year's Austrian forecasts have tracked the
severe downward slide in the world economy.
In October, WIFO and IHS had projected 2009 growth of
0.9-1.2% and the IMF 0.8%; November forecasts of the EU
Commission and the OECD were for 0.6% and -0.1%,
respectively; the December forecasts of the Austrian
National Bank (OeNB) was for -0.3% and of Bank Austria,
Austria's largest bank, for -0.5%. The December
forecast of the Economist Intelligence Unit is even for
-1.2%, and now the OeNB is also talking of a deeper
recession than currently predicted.

VIENNA 00001889 002 OF 003




6. At a press conference, WIFO Director Karl Aiginger
and IHS Director Bernhard Felderer talked of a severe
and prolonged recession with overwhelming downward
risks. Projections assume a slow calming of the
financial crisis. Both economists approve of the GoA
economic stimulus package but would prefer future-
oriented measures in lieu of "emergency" measures.
Aiginger and Felderer urged the GoA to swiftly
implement the bank rescue package -- since the GOA has
still not paid its promised funds to re-capitalize
banks.

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


7. The institutes based their revised 2009/2010
forecasts on the following assumptions:
-- U.S. growth of -0.8% (IHS) / -1.7% (WIFO) in 2009
and 0.25% (WIFO) / 1.5% (IHS) in 2010;
-- Euro-zone growth of -0.5% / -1.2% in 2009 and 0.5-
1.3% in 2010;
-- EU-27 growth of -0.5% / -0.8% in 2009 and 0.7-1.3%
in 2010;
-- German growth of -1% / -1.2% in 2009 and 0.4-1.3% in
2010;
-- oil $55 per barrel in 2009 and $60-70 in 2010;
-- USD/EUR 0.77-0.80 in 2009 and 2010 (see annex)

Can the Labor Market Sail Through?
--------------


8. The labor market is deteriorating quickly but not
as severely as expected. After record employment
growth of 2.4% in 2008 and a low unemployment rate of
about 3.5%, the institutes project an unemployment rate
of 3.9-4.1% in 2009 and 4.1-4.7% in 2010. If forecasts
hold, 4.7% is still below the levels of 2004-2006,
years with good economic growth. COMMENT: The GOA,
which will soon hold an "auto summit" to address the
crisis in Austria's automotive supplier industry, does
not appear to share this optimism.

Budget Deficit To Exceed 3% of GDP Soon
--------------


9. The federal budget benefited from strong revenues
though the first half, but the GoA spent those revenues
in pre-election handouts to compensate for inflation
(reftels) with a deficit of 0.6%/GDP for 2008. The
2009 budget is not yet available, but economic
stabilization measures (about 2% of GDP) will drive the
public sector deficit to at least 2.5-2.8% in 2009 and
3.2-3.3% in 2010. Aiginger and Felderer see no problem
in exceeding the 3% Maastricht deficit limit, but
complained that the GOA missed its chance to run
surpluses in good years would have given greater scope
for action now. They criticized the GoA's data
submission (reported to Brussels for the 2007-2010
stability program) as unrealistic. NOTE: Finance
Minister Proell is expected to submit the 2009 federal
budget to Parliament on April 21; final parliamentary
approval is scheduled for May 29, 2009.


10. Statistical Annex

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

WIFO IHS WIFO IHS
2009 2009 2010 2010
Real change:
GDP -0.5 -0.1 0.9 1.3
Manufacturing -2.8 n/a 2.0 n/a
Private consumption 1.0 1.4 1.0 1.1
Public consumption 1.0 0.3 1.0 1.0
Investment -3.8 -1.9 0.3 0.6
Exports of goods -0.5 -2.0 1.5 3.0
Imports of goods 0.3 -1.0 1.3 2.3

Nominal (EUR billion)
GDP 285.4 286.9 291.7 295.7


VIENNA 00001889 003 OF 003


Other indicators:
GDP deflator 1.7 1.7 1.3 1.8
Consumer prices 1.2 1.5 1.5 1.7
Unemployment rate 3.9 4.1 4.1 4.7
Current account (in
percent of GDP) 2.6 n/a 2.4 n/a
Exchange rate
(US$ 1.00 in Euro) 0.80 0.77 0.80 0.77

Note:
WIFO - Austrian Institute for Economic Research
IHS - Institute for Advanced Studies

GIRARD-DICARLO