Austrian Economy Looking Up; Long Haul Ahead

UNCLAS SECTION 01 OF 02 VIENNA 001081

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E.O. 12958: N/A
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: Austrian Economy Looking Up; Long Haul Ahead

REF: (A) VIENNA 0856; (B) VIENNA 0615


1. SUMMARY: Austria's economy shrank 0.4% in Q2/2009 (versus the
previous quarter),a sign of stabilization after the 2.7% first
quarter contraction. Economists say the recession is coming to an
end in Austria, but do not expect a swift upturn in the second half,
and see further deterioration in the labor market. A coalition
dispute over conditionality for GoA loan guarantees to industry
could delay a key stimulus program. Recent data show few
indications of a credit crunch in Austria and rates for commercial
loans have in line with ECB monetary easing, but consumer spreads
remain high, prompting a public outcry. END SUMMARY.

Current Snapshot
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2. According to interim report by the Institute for Economic
Research (WIFO),Austria's GDP slide flattened in the second
quarter. In Q2/2009, the economy contracted only 0.4% versus
Q1/2009 (real terms, seasonally and working day adjusted),after a
slump of 2.7% in Q1/2009. All demand aggregates were still negative
in Q2/2009 (except private consumption, which continued to track
upward) but the export decline was only 1% in Q2/2009 compared to
minus 6-8% in the previous two quarters. Investments also showed a
flattening downward trend, and as a result industrial production was
down only 3% in Q2/2009 after a fall of almost 10% in Q1/2009.

Outlook: No Recession, but No Real Turnaround Either
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3. Economists in Austria expect further improvement in the third
quarter based on polls, leading indicators, and stabilization in the
world economy. WIFO economists express confidence in their June
projection (ref A) that Austria's GDP will contract by 3.5% in 2009
-- i.e. the recession is basically over. Most economists say the
better-than-expected second quarter results mark the beginning of
the end of the recession -- but they do not expect a dynamic rebound
in the late 2009 or in 2010.

Labor Market
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4. Austria's labor market situation continues to deteriorate (while
still better than in much of the Eurozone). The unemployment rate
has rise from an 3.8% in 2008 (annual average) to 4.4% in June 2009,
with 230,000 unemployed -- up 33% from June 2008 and not including
an additional 100,000 workers on subsidized furlough status and in
training programs. Although the recession appears to be ending, the
labor market will continue to worsen in 2010 -- with shrinking
employment and rising unemployment.

Loan Guarantees for Industry
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5. The GoA has been quick to legislate economic stimulus but slow to
implement it (excepting income tax cuts, which were already on the
agenda). In the latest example, loan guarantees to help industry (a
EUR 10 billion program, carved out from the EUR 85 billion interbank
bond guarantee package) have now run into a political roadblock.


6. BACKGROUND: The new loan guarantee program -- open to any
domestic or foreign enterprise with a large jobs base in Austria --
offers market-based conditions and will still expose banks to some
default risk. The maximum guarantee amount per loan is EUR 300
million and will cover 30-70% of the total loan amount, the maximum
term is 5 years. A law creating the industrial loan guarantees was
approved by Parliament in early July and went into effect August 19.



7. Implementation of the guarantee facility has stalled after a
conflict between the governing parties over loan conditionality.
The conservative OVP-led FinMin has the lead on drafting loan terms,
but must obtain consent from the Chancellery (which is in
social-democratic hands). After Parliament approved the law,
Chancellor Werner Faymann and other Social Democrats proposed
capping salary and bonus payments to managers of companies receiving
GoA loan guarantees, a proposal rejected by conservative FinMin
Josef Proell. At this dispute plays out, loans to over a hundred
large industrial enterprises (who have applied for the guarantee)
are on hold. Industry representatives warn that further delays may
cause some companies to run into serious liquidity problems.

Credit Markets Easing, But Not for Consumers
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8. Recent data show few indications of a credit crunch in Austria
and the above mentioned GoA guarantee facility for industry loans

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should ease the situation further. Austrian National Bank data show
a rise for both loans to industry and private households in June.
Rates for bank loans to business and industry have fallen from 5.99%
in October 2008 to 2.79% in June 2009 -- mirroring the 3.25% drop in
the ECB'S leading interest rates. COMMENT: rates don't tell the
whole story, since lending standards have risen, terms are shorter,
and required collateral is much higher -- meaning that commercial
credit is in fact considerably tighter.


9. In contrast, spreads between consumer deposit and credit rates
are at very high levels. Loan rates for consumer credits have only
eased from 7.18% to 4.95%, while deposit rates (one-year maturity)
have cratered to 1.44% (from 4.77% before the crisis). Although
Austrian consumer spending is not particularly credit-driven,
perceived profiteering from the crisis has fueled negative press
against the banking sector.

EACHO