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UNCLAS SECTION 01 OF 03 VIENNA 000190 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB/VATUKORALA 
TREASURY PLEASE PASS TO OCC/ESIEGEL 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 AU EUN
SUBJECT: AUSTRIA'S 2006/2007 OUTLOOK - HIGHER GROWTH 
 
REFS:  05 VIENNA 3495 
 
 
Summary 
------- 
¶1.  Austria's two leading economic institutes have 
revised 2006 growth projections upward to 2.3-2.4%, based 
on stronger demand in export markets and a modest 
recovery of business investment.  However, the 2007 
growth rate should slow to 2.0-2.2%, as German demand 
dampens after implementation of a higher VAT.  Exports 
remain the driving force behind GDP growth, as 
comparatively low unit wage costs and strong productivity 
growth will enable exporters to benefit from increased 
demand in traditional markets.  The unemployment rate 
should remain at 5.2% in 2006, but rise to 5.3% in 2007, 
as projected economic growth will be insufficient to 
effect an increase in labor demand.  Inflation should 
ease from 2.3% in 2005 to below 2.0% in 2006/07, assuming 
more stable energy prices.  End Summary. 
 
 
Growth in 2006/07 - Light at the End of the Tunnel? 
--------------------------------------------- ------ 
¶2.  The Austrian Institute for Economic Research (WIFO) 
and the Institute for Advanced Studies (IHS) recently 
presented revised projections for 2006 and an initial 
forecast for 2007.  Both institutes upgraded growth 
expectations from previous prognoses (reftel), based on 
stronger export demand and a projected, modest recovery 
of investments and private consumption.  WIFO raised its 
2006 growth forecast from 1.8% to 2.4% and IHS its 
estimate from 2.1% to 2.3%.  Projections for 2007 are for 
slightly lower growth of 2.0-2.2%.  Austrian exports will 
continue to propel economic growth in 2006, benefiting 
from a generally favorable global environment and 
increased demand in Germany prior to the 2007 VAT 
increase. 
 
¶3.  For 2007, the institutes predict slightly lower 
economic growth, as the full effect of higher VAT in 
Germany dampens export growth in Austria.  Consolidating 
modest growth rates in 2006-2007 will require that export 
growth encourages stronger business investment, which has 
been very weak in 2004-2005.  WIFO Director Karl Aiginger 
cautioned that private consumption remains hampered by 
moderate income growth and a high savings rate.  Since 
2000, private consumption has grown only 1% in real terms 
and should only growth around 2% in 2006-2007.  The 
savings rate should decrease only slightly to 9.0-9.5% in 
2006-2007. 
 
¶4.  Exports remain key for Austria's economic growth.  In 
2005, Austrian exporters lost market shares in Central 
and Eastern Europe, as well as in Western Europe. 
Economists interpreted this as a correction of the very 
large market shares obtained in 2004.  With declining 
unit wage costs (25% below 1995 levels), resulting from 
moderate wage increases and strong productivity growth, 
Austrian exporters are well positioned to benefit from 
anticipated economic upswings in important markets, such 
as Germany, Southeastern Europe, and oil-exporting 
countries. 
 
 
Risks for the Forecasts - Oil Prices and Exchange Rates 
--------------------------------------------- ---------- 
¶5.  Main short-term risks for the forecasts are volatile 
energy prices and an uncertain Euro/dollar exchange rate. 
Moreover, in 2007, German demand will most likely 
diminish, as the VAT increase takes effect.  WIFO and IHS 
cautioned that a moderate weakening of U.S. economic 
growth also represents a downside risk.  However, there 
is also an upward risk, should business investment 
improve significantly and private consumption overcome 
its five-year weakness. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
¶6.  The institutes based their 2006/2007 forecasts on the 
following assumptions: 
-- U.S. economic growth of 3.0-3.3% in 2006 and 3.0 in 
2007; 
-- Euro area growth of 2.0-2.1 in 2006 and 1.8-1.9% in 
2007; 
-- EU-25 growth of 2.2-2.3% in 2006 and 2.0% in 2007; 
-- German growth of 1.8-1.9% in 2006 and 1.2-1.5% in 
2007; 
-- oil prices of $53-57 per barrel in 2006 and $50-62 in 
2007; and 
-- dollar/Euro exchange rates of 0.81-0.86 in 2006 and 
0.81-0.89 in 2007. 
 
 
Other Forecasts 
--------------- 
¶7.  The results of the WIFO and IHS forecasts track with 
those of other institutions.  The IMF's September 2005 
World Economic Outlook projects economic growth of 2.2% 
in 2006 for Austria, while the European Commission's fall 
2005 Economic Forecast predicts growth rates of 1.9% in 
2006 and 2.2% in 2007.  The Austrian National Bank's 
December 2005 forecast is for 2.3% growth in 2006 and 
¶2007.  Bank Austria Creditanstalt, Austria's largest 
commercial bank, is more pessimistic, projecting growth 
of 2.0% in 2006, but only 1.7% in 2007, based on a 
weakening global economy, the VAT increase in Germany, 
and restrictive budgetary policies in the Euro area. 
 
 
Inflation Easing, Unemployment A Persistent Problem 
--------------------------------------------- ------ 
¶8.  Assuming more stable external factors, particularly 
more stable oil prices, inflation should ease from 2.3% 
in 2005 to 1.8-1.9% in 2006 and 1.6-1.9% in 2007. 
 
¶9.  Per capita gross wages will increase 2.8-2.9% in 2006 
and 2.5-2.7% in 2007.  Due to continued strong hourly 
productivity growth of 4-5% in industry, unit labor costs 
in industry will drop about 1.7% both years, helping to 
improve Austria's international competitiveness. 
 
¶10.  Despite higher economic growth in 2006/07 and 
employment growth of close to 1.0% in both years, 
Austria's unemployment rate will not decline from its 
current level of 5.2%.  The projected economic growth 
will be insufficient to create substantial additional 
labor demand, offsetting the expansion of labor supply. 
Only an increase in the number of those in training 
programs, and therefore not statistically unemployed, 
will prevent a further rise in the unemployment rate. 
 
Public Finance 
-------------- 
¶11.  The GoA's corporate/income tax cut will push the 
2005 total public sector deficit to 1.7% of GDP.  In 
2006, cost-savings from administrative reform will not 
offset the continued impact of the tax cut, a civil 
service wage increase and higher expenses for labor 
market and R&D programs.  Therefore, the institutes again 
expect a deficit of close to 2.0% of GDP.  Assuming the 
GoA undertakes measures to cut the deficit, the 
institutes project the total public sector deficit to 
come down to 1.5% in 2007.  The GoA's 2005-2008 Stability 
Program, published in November 2005, foresees a deficit 
of 0.8% of GDP in 2007 and a balanced total public sector 
budget in 2008. 
 
 
¶12.  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                  2.4      2.3        2.0      2.2 
Manufacturing        4.3      n/a        3.7      n/a 
Private consumption  1.8      1.9        2.0      1.8 
Public consumption   1.0      1.0        0.5      0.5 
Investment           2.7      3.1        2.4      3.0 
Exports of goods     6.5      5.7        5.7      5.5 
Imports of goods     5.3      5.0        5.2      4.8 
 
Nominal Euro billion 
equivalents: 
GDP                256.2    256.2      266.3    265.7 
 
Other indices: 
GDP deflator         1.9      1.8        1.9      1.5 
Consumer prices      1.9      1.8        1.9      1.6 
Unemployment rate    5.2      5.3        5.2      5.3 
Current account (in 
    percent of GDP)  0.3      0.5        0.3      0.6 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.86     0.81       0.89     0.81 
 
McCaw