VZCZCXRO6308
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #0979/01 1060706
ZNR UUUUU ZZH
R 160706Z APR 07
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 7006
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 000979 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY PLEASE ALSO PASS TO OCC/EILEEN SIEGEL AND FEDERAL RESERVE 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
USDOC PLEASE PASS TO OITA 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB PGOV AU
SUBJECT: AUSTRIA'S ECONOMY: STRONGER GROWTH IN 2007/2008 
 
REFS:  A) VIENNA 0088  B) 06 VIENNA 3591 
 
Summary 
------- 
 
¶1.  Austria's two leading economic institutes recently revised GDP 
growth forecasts upward for 2007 and 2008.  Following 3.2% growth in 
2006, latest estimates are for growth of 3.0% in 2007 and 2.4-2.6% 
in 2008.  Strong exports, a robust investment cycle and improving 
private consumption are propelling growth.  Austria's unemployment 
rate should drop to 4.2-4.5% in 2007 from 4.8% in 2006, but the rate 
will probably remain stagnant through 2011 due to lower economic 
growth.  Inflation remains low at 1.6-1.8% in 2007-2008.  The GoA 
revised the 2006 consolidated public budget deficit down to 1.1%. 
However, economists cautioned that a budget deficit of more than 
1.0% is too high, given that Austria is at the peak of a growth 
cycle.  Both economic institutes called on the GoA to implement 
additional structural reforms and to resist spending additional tax 
windfalls.  End Summary. 
 
 
Dynamic Growth For 2007 and 2008 
-------------------------------- 
 
¶2.  The Austrian Institute for Economic Research (WIFO) and the 
Institute for Advanced Studies (IHS) recently presented their 
projections for 2007 and 2008.  After a stronger than expected 
growth rate of 3.2% in 2006, both institutes have revised their 2007 
growth forecasts upward to 3.0% (WIFO) and 2.9% (IHS) in 2007.  The 
primary reasons driving the revised outlook include continued strong 
economic fundamentals; optimistic expectations from Austrian 
business; strong growth in the Euro area; and dynamic growth 
opportunities in new EU member states and other important export 
markets in Eastern and Southeastern Europe.  Industry, the 
construction sector and banks should particularly benefit from 
strong growth in 2007.  With growth of 3.0% or more in both 2006 and 
2007, Austria's economy is, however, most likely at the peak of its 
current cycle. 
 
¶3.  Projections for 2008 are for slightly lower growth of 2.4-2.6% 
due to the expected slowdown in Europe, a weaker U.S. economy, and 
slower growth in China.  In both 2007 and 2008, growth in Austria 
should again be higher than the Euro area average, as it has been 
over the last five years.  In both years, strong exports, a robust 
investment cycle and continued improving private consumption will 
contribute to growth.  The savings rate will remain approximately 9% 
of disposable income in both years. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶4.  The institutes based their revised 2007/2008 forecasts on the 
following assumptions: 
-- U.S. economic growth of 2.0-2.5% in 2007 and 2.3-3.0% in 2008; 
-- Euro area growth of 2.5-2.7% in 2007 and 2.2-2.3% in 2008; 
-- EU-27 growth of 2.8-2.9% in 2007 and 2.4-2.5% in 2008; 
-- German growth of 2.3-2.5% in 2007 and 2.0-2.3% in 2008; 
-- oil prices of $61-64 per barrel in 2007 and $62-64 in 2008; and 
-- dollar/Euro exchange rates of 0.75-0.77 in 2007 and 0.71-0.77 in 
¶2008. 
 
¶5.  Parallel to the improved economic outlook, the risks associated 
with the forecasts have also risen, particularly the expected 
weakening of the U.S. economy.  The forecasts assume a soft landing 
and only a temporary weakening.  A stronger than expected downturn 
in the U.S. economy, likely accompanied by a further strengthening 
of the Euro, would dampen Austria's growth prospects. 
 
 
Unemployment Down, But No Further Improvements 
--------------------------------------------- - 
 
¶6.  Robust economic growth will have a noticeable impact on the 
labor market in 2007.  After the creation of 50,000-60,000 jobs in 
2006, a 3.0% growth rate in 2007 should spur continued strong 
employment growth.  However, since Austria's labor supply will also 
show strong growth, the number of unemployed will drop by only 
19,000-23,000 in 2007.  The unemployment rate will ease to 4.2-4.5% 
from 4.8% in 2006.  Due to expected lower growth in 2008, economists 
do not expect further labor market improvements.  The unemployment 
rate will remain at 4.1-4.4% in 2008.  Mid-term forecasts indicate 
that the unemployment rate will remain at that level until 2011. 
 
 
VIENNA 00000979  002 OF 002 
 
 
 
Inflation No Problem 
-------------------- 
 
¶7.  Inflation will remain at 1.6-1.8% in 2007/08.  Moderate wage 
increases have helped keep inflation low.  Slow growth in private 
consumption will also exert a dampening effect on prices. 
 
 
Deficit Down, But Should Be Better 
---------------------------------- 
 
¶8.  Strong growth has produced higher than expected tax revenues, 
particularly higher corporate tax and VAT revenues.  The 2006 total 
public sector deficit has been revised downward to 1.1% instead of 
the budgeted 1.7%.  For 2007, the GoA has budgeted for a total 
public sector deficit of 0.9% of GDP (federal government -1.3%, 
state and local governments +0.4%), and a 2008 deficit of 0.7% 
(federal government -1.2%, state and local governments +0.5%).  WIFO 
and IHS noted that a deficit of 1.0% or more is too high, given that 
Austria is at the peak of a robust growth cycle.  Both institutes 
called for further structural reforms and to resist spending the 
additional tax windfalls (ref B). 
 
 
¶9.  Statistical Annex 
 
 
                      Austrian Economic Indicators 
                   (percent change from previous year, 
                        unless otherwise stated) 
 
                    WIFO     IHS      WIFO      IHS 
                    project. project. project.  project. 
                    2007     2007     2008      2008 
Real terms: 
GDP                  3.0      2.9        2.4      2.6 
Manufacturing        6.0      n/a        3.3      n/a 
Private consumption  2.2      2.4        2.0      2.1 
Public consumption   1.7      1.0        1.6      1.0 
Investment           5.5      4.8        3.4      3.8 
Exports of goods     8.3      9.1        7.0      8.3 
Imports of goods     8.5      8.5        6.5      7.5 
 
Nominal Euro billion 
equivalents: 
GDP                268.7    268.6      280.0    279.9 
 
Other indices: 
GDP deflator         1.8      1.8        1.7      1.5 
Consumer prices      1.7      1.6        1.8      1.6 
Unemployment rate    4.2      4.5        4.1      4.4 
Current account (in 
    percent of GDP)  2.2      n/a        2.3      n/a 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.75     0.77       0.71     0.77 
 
KILNER