VZCZCXRO1685
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHVI #2030/01 1881010
ZNR UUUUU ZZH
R 071010Z JUL 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 4161
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
RUEHFR/AMEMBASSY PARIS 0758

UNCLAS SECTION 01 OF 03 VIENNA 002030 
 
SIPDIS 
 
SIPDIS 
 
PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY ALSO FOR OCC/EILEEN SIEGEL 
TREASURY ALSO PASS FEDERAL RESERVE 
USDOC PASS TO OITA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: AUSTRIA'S 2006/2007 OUTLOOK CONTINUES TO IMPROVE 
 
REF:  VIENNA 1152 
 
Summary 
------- 
 
¶1.  The Austrian economy exhibits solid growth and more 
optimism.  Data for the first few months of 2006 show 
strong growth of exports and investments, and some 
improvement in private consumption.  The two leading 
Austrian economic institutes have upgraded their 2006 
forecasts slightly, predicting real GDP growth of 2.5- 
2.6%, with forecasts of growth of 2.1-2.2% in 2007.  The 
2006 growth rate will be the highest since 2000, and will 
be higher than that of the Euro area.  The forecasts are 
relatively safe against downward revisions.  Due to a 
strong rise in employment sparked by solid economic 
growth and a related decline in the number of unemployed, 
the institutes project unemployment rate at 5.0% in 2006 
and 5.1% in 2007.  Inflation is not a problem.  The total 
public sector deficit is under control.  End Summary. 
 
Solid Growth in 2006 and 2007 - More Optimism 
--------------------------------------------- 
 
¶2.  On June 30, the Austrian Institute for Economic 
Research (WIFO) and the Institute for Advanced Studies 
(IHS) presented their revised projections for 2006 and 
2007, relfecting only marginal changes from their March 
2006 estimates.  For 2006, IHS reaffirmed its 2.5% growth 
forecast while, WIFO raised its projection from 2.4% to 
2.6%.  Projections for 2007 are for slightly lower 
growth. WIFO revised its 2009 projection upward to 2.1%, 
while HIS kept its projection at 2.2%.  The 2006 growth 
will be the highest since 2000, and will be half a 
percentage point higher than that of the Euro area. 
Despite several unfavorable parameters, including high 
Euro exchange rate, high oil prices, and rising interest 
rates, economists view the outlook as better than before. 
Exports and investments will drive economic growth in 
¶2006.  Private consumption remains mediocre.  In real 
terms, goods exports, benefiting from a strong 
international economic environment and Austria's improved 
international competitiveness, are forecast to grow by 
8.0% and investments by 3.5% (Investments grew by 1.6% in 
2005 and 0.6% in 2004). Pivate consumption will only rise 
by some 2.0% (1.4% in 2005 and 0.8% in 2004).  Available 
data for the first few months of 2006 support 
entrepreneurs' rising optimism.  For 2007, the 
institutes, as before, expect a slightly lower economic 
growth rate, because additional domestic demand is 
unlikely to offset less thriving exports resulting from a 
little less dynamic world economy and a negative impact 
from the German VAT increase.  Both WIFO Director Karl 
Aiginger and IHS Director Bernhard Felderer stressed that 
the lower growth in 2007 will not indicate the start of a 
downturn, but just a dent in the upswing.  The dynamics 
of the Austrian economic recovery will remain unbroken in 
2007, but the German VAT increase will affect the 
Austrian economy more than that ofother European 
countries. 
 
Private Consumption Still Slow 
------------------------------ 
 
¶3.  The rising number of people employed Qll lead to a 
increase in real total disposable income by about 2.0% 
annuQly in both 2006 and 2007. However, on a per capita 
basis, real disposable net incomes, despite the income 
tax cut, will rise only 0.7% in 2006 and 0.4% in 2007. 
Since the savings rate will remain stable at about 9.5% 
of disposable incomes, private consumption will grow only 
around 2.0% in both years.  This is an improvement from 
2004 (+0.8%) and 2005 (+1.4%), but private consumption 
remains the laggard among demand aggregates. 
 
Unemployment Starting to Decline 
-------------------------------- 
 
¶4.  The solid economic recovery is now starting to have a 
positive effect on the labor market. It has sparked an 
additional 40,000 jobs in 2006 and another 34,000 in 
2007, most of which are full time jobs.  At the same 
time, the number of unemployed had started to decline. 
 
VIENNA 00002030  002.2 OF 003 
 
 
In June 2006, the number of unemployed was the lowest in 
three years.  However, the projected decline of 11,000 in 
the number of unemployed in 2006 is in part due to GoA 
job training programs.  In 2007, the number of unemployed 
could rise again, because the number of people in job 
training programs (and therefore not counting as 
unemployed) may drop due to lower funding.  As a result, 
the unemployment rate will be 5.0% in 2006 and 5.1% in 
¶2007.  Aiginger attributed the labor market improvement 
this year primarily to the GoA's training measures and 
said that the GoA will have to confront the labor market 
problem for several more years.  Felderer said that the 
2006 employment growth was the biggest since the early 
1990s and that part of Austria's unemployment problem is 
a problem of matching the qualifications, of job 
searchers with those in demand. 
 
Risks for the Forecasts - Exchange Rates and Oil Prices 
--------------------------------------------- ---------- 
 
¶5.  WIFO and IHS are more optimistic than three months 
ago and felt that their forecasts are rather safe against 
downward revisions.  The main risks, according to 
Aiginger, are the effects of the German VAT increase, the 
oil price, the Euro exchange rate and uncertainty about 
the U.S. economy.  Felderer saw no problem for the U.S. 
economy in 2006 or 2007, but was concerned about longer- 
term prospects and about how the U.S. will deal with the 
twin deficits and the real estate bubble. 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶6.  The institutes based their revised 2006/2007 
forecasts on the following assumptions: 
-- U.S. economic growth of 3.3-3.5% 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 $68 per barrel in 2006 and $68-70 in 
2007; and 
-- dollar/Euro exchange rates of 0.80 in 2006 and 0.79- 
0.80 in 2007. 
 
Inflation No Problem 
-------------------- 
 
¶7.  Inflation is not a problem, and will stay around 1.6- 
1.7% in 2006 and 1.6-1.8% in 2007.  The oil price 
increase has had little effect so far. Due to the 
relatively high unemployment rate, economists do not 
expect significant secondary effects via higher wage 
increases.  Increasing imports of cheap industrial goods 
have a price dampening effect and contribute to low 
inflation. 
 
Public Finance 
-------------- 
 
¶8.  The 2006 total public sector deficit is projected at 
1.7-1.8% of GDP, slightly higher than the 1.5% of GDP 
last year.  The reason is that cost-savings from 
administrative reform will not offset the continued 
impact of the tax cut and higher expenses in many areas, 
such as for a civil service wage increase, R&D and SMEs. 
For 2007, the institutes expect a deficit of 0.8-1.3%. 
However, no budget draft is available.  The GoA's 2005- 
2008 Stability Program foresees a deficit of 0.8% of GDP 
in 2007 and a balanced total public sector budget in 
¶2008. 
 
 
¶9.  Statistical Annex 
 
 
                      Austrian Economic Indicators 
                   (percent change from previous year, 
                        unless otherwise stated) 
 
                    WIFO     IHS      WIFO      IHS 
 
VIENNA 00002030  003 OF 003 
 
 
                    project. project. project.  project. 
                    2006     2006     2007      2007 
Real terms: 
GDP                  2.6      2.5        2.1      2.2 
Manufacturing        5.5      n/a        4.5      n/a 
Private consumption  1.9      2.1        2.0      1.8 
Public consumption   1.3      1.1        0.5      0.5 
Investment           3.6      3.5        3.3      2.9 
Exports of goods     8.0      8.5        5.7      7.0 
Imports of goods     6.9      8.0        6.0      6.4 
 
Nominal Euro billion 
equivalents: 
GDP                256.9    256.6      266.8    266.1 
 
Other indices: 
GDP deflator         1.8      1.7        1.7      1.5 
Consumer prices      1.7      1.6        1.8      1.6 
Unemployment rate    5.0      4.9        5.1      4.9 
Current account (in 
    percent of GDP)  1.2      1.4        0.9      1.5 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.80     0.80       0.80     0.79 
 
MCCAW