VZCZCXRO0735
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHVI #1152/01 1111325
ZNR UUUUU ZZH
R 211325Z APR 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 3172
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
RUEHFR/AMEMBASSY PARIS 0740

UNCLAS SECTION 01 OF 03 VIENNA 001152 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY ALSO PASS FOR OCC/EILEEN SIEGEL 
TREASURY ALSO PASS FEDERAL RESERVE 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
USDOC ALSO PASS TO OITA 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: AUSTRIA'S 2006/2007 OUTLOOK - SOLID GROWTH AND 
MORE OPTIMISM 
 
REF:  Vienna 190 
 
Summary 
------- 
 
¶1.  Two Austrian economic institutes have presented 
growth projections of 2.4-2.5% for 2006 and 2.0-2.2% for 
¶2007.  Although export growth remains the engine driving 
the economy, industrial production and business 
investment should increasingly contribute to growth. 
Private consumption remains weak, below a typical rate at 
the early stage of an upswing.  The unemployment rate of 
5.2% remains historically high and will likely be a major 
campaign issue in fall national elections.  Inflation 
should remain low at 1.4-1.7% in 2006.  End Summary. 
 
 
Growth in 2006 and 2007 - Moderate But Solid 
-------------------------------------------- 
 
¶2.  The Austrian Institute for Economic Research (WIFO) 
and the Institute for Advanced Studies (IHS) recently 
presented revised projections for 2006 and 2007, with 
only marginal changes from December 2005 estimates.  For 
2006, WIFO maintained its 2.4% growth forecast, while IHS 
raised its growth projection from 2.3% to 2.5%.  Austrian 
exports will again drive economic growth in 2006.  Export 
growth will benefit from a continued strong global 
environment, as well as from additional temporary demand 
in Germany prior to the 2007 VAT increase.  Notably, the 
upswing has developed a domestic force, i.e., strong 
industrial production, growing tourism revenue, and an 
anticipated rise in business investment, which has been 
weak in 2004/2005.  Private consumption will pickup 
somewhat, but it will not contribute significantly to the 
upswing. 
 
¶3.  Projections for 2007 for slightly lower growth of 
2.0% (WIFO) and 2.2% (IHS) remained unchanged.  The 
institutes predict slower growth in 2007, as additional 
domestic demand fails to offset the negative impact of 
lower global demand and much lower demand from Germany 
due to the VAT increase.  Nevertheless, both WIFO 
Director Karl Aiginger and IHS Director Bernhard Felderer 
stressed that lower growth in 2007 will likely be only an 
aberration of an upward growth trend. 
 
 
Problem Areas - Private Consumption, Unemployment 
--------------------------------------------- ---- 
 
¶4.  Economists expect private consumption will grow more 
robustly than in 2004/2005 thanks to rising incomes, 
easing inflation and a stable savings rate of 
approximately 9.5% of disposable incomes.  WIFO and IHS 
now forecast private consumption to grow at a real rate 
of 1.9-2.1% in 2006 and 1.8-2.0% in 2007.  Despite an 
improvement from 2004 (+0.8%) and 2005 (+1.4%) and a 1.0% 
annual average during the last five years, the growth in 
private consumption remains below the long-term trend of 
2.3%.  Moreover, the growth rate is below a typical rate 
at an early phase of an upswing. 
 
¶5.  The number of employed should decline by 3,000 in 
¶2006. This does not indicate a fundamental reversal of 
labor market conditions.  The unemployment rate will 
remain around 5.2% in both 2006 and 2007.  In 2007, the 
number of unemployed could rise again slightly, as the 
number of people in job training (and therefore not 
technically unemployed) falls due to likely funding 
shortages.  This is above the level in recent years of 
some 4.5%.  Labor market problems will therefore persist 
and will continue as a high priority for the government, 
especially in the run-up to national elections this 
autumn. 
 
 
Risks for the Forecasts - Exchange Rates and Oil Prices 
--------------------------------------------- ---------- 
 
¶6.  Both WIFO and IHS voiced confidence that downward 
risks have diminished in the last three months.  A major 
 
VIENNA 00001152  002 OF 003 
 
 
uncertainty is whether or not businesses will actually 
implement current plans for increased investment 
spending.  Globally, a possible slowdown in U.S. economic 
growth, as well as persistent concerns about the U.S. 
budget deficit, current account deficit, and real estate 
bubble, remain downside risks.  Oil prices should remain 
stable at the relatively high current level, but this is 
also a downside risk. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶7.  The institutes based their revised 2006/2007 
forecasts on the following assumptions: 
-- U.S. economic growth of 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 1.9-2.0% in 2006 and 1.2-1.5% in 
2007; 
-- oil prices of $59-60 per barrel in 2006 and $58-60 in 
2007; and 
-- dollar/Euro exchange rates of 0.81-0.86 in 2006 and 
0.81-0.89 in 2007. 
 
 
Inflation Easing, Interest Rates Tending Upwards 
--------------------------------------------- --- 
 
¶8.  Inflation eased due to a stabilization of oil prices 
and statistical effects, such as the leveling off of 
price increases for housing and health services.  The 
institutes now project an inflation rate of 1.4-1.7% in 
2006 and 1.6-1.9% in 2007.  Given current low interest 
rates, Aiginger expects the European Central Bank to 
raise interest rates once more in 2006. Most economists, 
including Felderer, expect a series of increases, because 
the Euro-zone inflation remains above the 2% target. 
 
 
Public Finance 
-------------- 
 
¶9.  The 2005 total public sector deficit was only 1.5% of 
GDP - less than the 1.9% budgeted.  In 2006, cost-savings 
from administrative reform will not offset the continued 
impact of 2005 income and corporate tax cuts and higher 
expenditures in many areas, such as a civil service wage 
increase.  Therefore, the institutes expect a deficit of 
about 1.8-1.9% of GDP in 2006.  For 2007, the institutes 
expect a deficit of between 0.8 and 1.5%.  The GoA's 2005- 
2008 Stability Program foresees a deficit of 0.8% of GDP 
in 2007 and a balanced budget by 2008. 
 
 
¶10.  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      2.5        2.0      2.2 
Manufacturing        5.0      n/a        4.2      n/a 
Private consumption  1.9      2.1        2.0      1.8 
Public consumption   1.3      1.0        0.5      0.5 
Investment           3.2      4.0        2.7      3.2 
Exports of goods     6.5      6.0        5.7      5.8 
Imports of goods     5.5      5.7        5.4      5.0 
 
Nominal Euro billion 
equivalents: 
GDP                256.9    256.5      267.2    265.4 
 
Other indices: 
GDP deflator         1.8      1.5        1.9      1.2 
Consumer prices      1.7      1.4        1.9      1.6 
 
VIENNA 00001152  003 OF 003 
 
 
Unemployment rate    5.2      5.1        5.2      5.1 
Current account (in 
    percent of GDP)  0.6      0.4        0.7      0.6 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.86     0.81       0.89     0.81 
 
KILNER