AUSTRIA'S GROWTH SLOWING AS CONCERN ABOUT INTERNATIONAL

UNCLAS SECTION 01 OF 03 VIENNA 000513 SIPDIS SIPDIS TREASURY FOR OASIA/ICB (VIMAL ATUKORALA) TREASURY PLEASE PASS TO OCC (EILEEN SIEGEL) AND FEDERAL RESERVE USDOC FOR OITA AND 4212/MAC/EUR/OWE/PDACHER PARIS ALSO FOR USOECD E.O. 12958: N/A TAGS: ECON EFIN ELAB EUN AU SUBJECT: AUSTRIA'S GROWTH SLOWING AS CONCERN ABOUT INTERNATIONAL FINANCIAL CRISIS GROWS REF: VIENNA 23 Summary -------------- ¶1. Based on continuing uncertainty in international financial markets, Austria's two leading economic institutes have recently slightly reduced GDP growth forecasts for 2008 to 2.1%. Exports will remain the driving force behind growth, as consumer spending remains sluggish. Projections for 2009 growth rates are 1.7-2.2%. The Austrian economy continues to profit from strong growth in Central and Eastern Europe and Southeastern Europe (CEE/SEE). With substantial investments in CEE/SEE and limited exposure to the U.S. real estate and financial markets, Austrian banks have only had to write off Euro one billion out of a total of Euro 875 billion in assets. Unemployment should remain relatively low in 2008 at 4.2% and inflation, although creeping up somewhat, should remain low at 2.6%-2.9%. The budget deficit is forecast to rise from 0.5% of GDP to 0.7% of GDP in 2008. Despite the small deficit, economists and the IMF have criticized the GoA for not reining in spending more during the recent period of strong growth in revenues. End Summary. Slower Growth in 2008 -------------- ¶2. The Austrian Institute for Economic Research (WIFO) and the Institute for Advanced Studies (IHS) recently presented revised growth projections for 2008 and 2009. Both institutes downgraded their 2008 forecasts to 2.1%, considerably less than the 3.4% recorded in 2007. For the sixth consecutive year, Austria's growth rate should be at least half a percentage point above overall Euro area growth. Exports continue to drive growth. Investment spending remains disappointing and consumer spending is sluggish, reflecting stagnating real after-tax incomes in 2007 and 2008. 2009 - Less Dynamic and Highly Uncertain -------------- ¶3. For 2009, the institutes shaved 0.3% off of their previous forecasts, with WIFO now at 1.7% and IHS at 2.2%. IHS' higher projection reflects a more optimistic view of the global, and in particular of the U.S., economic situation. Both institutes predict a slowdown in global growth in 2008. WIFO assumes the U.S. economy will stabilize by mid-2008 with further improvement during 2009. IHS expects stronger growth in the U.S. and globally somewhat earlier, as Federal Reserve actions and the U.S. fiscal stimulus package take effect. In 2008 and 2009, Austria will continue to greatly benefit from strong growth in the neighboring Central and East European and Southeast European countries (CEE/SEE). The Impact of the International Financial Crisis -------------- --- ¶4. The downward revisions for 2008 and 2009 are based on uncertainty about the depth and duration of the ongoing international financial crisis. WIFO Director Karl Aiginger und IHS Director Bernhard Felderer cautioned that their projections, particularly those for 2009, contained major uncertainties and downside risks. According to the institutes, the Austrian economy remains robust with no present danger of recession. Austrian financial institutions are somewhat protected against turbulence on the international financial markets because they have heavily invested in CEE/SEE, with minimal exposure to the U.S. subprime sector. According to the Austrian National Bank, Austrian banks have only had to write-off Euro one billion in assets due to international exposure. The ANB estimated total Austrian bank assets at more than Euro 875 billion at year-end 2007. Assumptions for Growth Forecasts -------------- ¶5. The institutes based their revised 2008/2009 forecasts on the following assumptions: -- U.S. economic growth of 1.0-1.8% in 2008 and 1.4-2.3% in 2009; -- Euro area growth of 1.6-1.7% in 2008 and 1.3-2.0% in 2009; -- EU-27 growth of 1.9-2.0% in 2008 and 1.6-2.3% in 2009; -- German growth of 1.4-1.7% in 2008 and 1.2-1.7% in 2009; -- oil prices of $95-96 per barrel in 2008 and $96-97 in 2009; and -- dollar/Euro exchange rates of 0.63-0.68 in 2008 and 0.63-0.70 in VIENNA 00000513 002 OF 003 ¶2009. Unemployment Down, But Only Through 2009 -------------- ¶6. During 2005-2007, robust economic growth created 170,000 new jobs, with the unemployment rate declining from 5.2% in 2005 to 4.4% in 2007. The forecast for 2008 GDP growth of 2.1% will bolster demand for labor, dropping the unemployment rate still further to 4.2-4.3%. However, economists predict that lower growth in 2009 will lead to a turnaround on the labor market, as labor supply will again exceed demand with the unemployment rate stagnant at 4.3-4.4%. Inflation Remains a Concern, But Wage Growth Slow -------------- -------------- ¶7. Inflation remains a concern, particularly since two-thirds of the CPI increase results from rising food, energy and housing prices. In 2008, the institutes project an annual average CPI increase of 2.6-2.9% (up from the 2.2% in 2007),with food prices expected to rise 7% and energy prices even more. Projected lower inflation in 2009 reflects a slowdown in growth and stabilization of energy and raw materials prices. The projected 2009 CPI will remain above the European Central Bank's price stability goal of a maximum inflation of 2.0%. Creeping inflation and higher social insurance contributions have had considerable impact on wages. While average pre-tax wages rose 2.7% each in 2006 and 2007, real after-tax incomes rose only 0.5% in 2006 and 0.1% in 2007. In 2008 and 2009, pre-tax wages should increase 3.3% and 3.0%, respectively, but real after-tax incomes are forecast to decline 0.1% in 2008 and rise only 0.3% in 2009. IMF: GoA Should Do More to Balance Budget -------------- ¶8. Preliminary figures show the 2007 total public sector deficit at 0.5% of GDP, down from 1.5% in 2006. Total budget revenues were Euro 3.8 billion (+5.7%) higher than budgeted, but expenditures were also up Euro 2.7 billion (+4.0%). Economists have criticized the GoA for spending most of the windfall revenues without moving to cut expenditures. Aiginger predicted that the deficit would increase again to at least 0.7% of GDP in 2008. Felderer was more pessimistic, characterizing as highly unlikely the GoA's plan to achieve a budget surplus in 2010. According to the IMF's preliminary conclusions from its recent Article IV consultations with Austria, the GoA has not done enough on budget consolidation during the recent years of strong economic growth. The IMF added that "current policies, were unlikely to deliver a balanced budget by 2010... and that consolidation measures should be implemented sooner rather than later." ¶9. Statistical Annex Austrian Economic Indicators (percent change from previous year, unless otherwise stated) WIFO IHS WIFO IHS project. project. project. project. 2008 2008 2009 2009 Real terms: GDP 2.1 2.1 1.7 2.2 Manufacturing 3.0 n/a 2.8 n/a Private consumption 1.6 1.6 1.6 1.8 Public consumption 2.5 3.0 1.0 -0.5 Investment 2.2 2.7 1.8 2.6 Exports of goods 5.7 6.0 5.7 7.0 Imports of goods 5.8 6.6 5.7 6.5 Nominal Euro billion equivalents: GDP 285.8 284.8 296.9 296.4 Other indices: GDP deflator 2.6 2.2 2.1 1.9 Consumer prices 2.9 2.6 2.3 1.9 Unemployment rate 4.2 4.3 4.3 4.4 Current account (in percent of GDP) 3.0 n/a 2.9 n/a VIENNA 00000513 003 OF 003 Exchange rate for US$ 1.00 in Euro 0.63 0.68 0.63 0.70 KILNER