VZCZCXRO4433
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #2001/01 2081441
ZNR UUUUU ZZH
R 271441Z JUL 07
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 8177
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
RUEHFR/AMEMBASSY PARIS 0815

UNCLAS SECTION 01 OF 02 VIENNA 002001 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB (VIMAL ATUKORALA) 
TREASURY PLEASE PASS TO OCC (EILEEN SIEGEL) AND TO FEDERAL RESERVE 
USDOC FOR OITA AND 4212/MAC/EUR/OWE (PDACHER) 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: AUSTRIA'S IMPROVED 2007/2008 GROWTH OUTLOOK 
 
REFS:  A) VIENNA 0979  B) VIENNA 1715 
 
Summary 
------- 
 
¶1.  Austria's two leading economic institutes recently again revised 
GDP growth forecasts upward for 2007 and 2008.  Growth in 2007 
should be 3.1-3.2% and 2.5-2.8% in 2008.  Strong exports, a robust 
investment cycle and improving private consumption are driving 
growth.  Austria's unemployment rate should drop to 4.3% in 2007, 
but will probably remain stagnant at that level during 2008-2011 due 
to expected lower economic growth.  Despite Austria's excellent 
current economic performance, the economic institutes have urged the 
GoA to implement initiatives to raise economic growth and reach full 
employment, to continue efforts to balance the budget, and to 
introduce additional wage flexibility.  End Summary. 
 
 
2006 Growth Figure Revised Upward to 3.3% 
----------------------------------------- 
 
¶2.  Latest revised figures from Statistics Austria indicate a real 
GDP growth rate of 3.3% in 2006, higher than the EU-27 average of 
3.0% and the Euro area average of 2.7%.  In nominal terms, Austria's 
GDP reached Euro 257.9 billion.  Per capita GDP was Euro 31,140 in 
¶2006. 
 
 
2007 - Over 3% Growth, 2008 - Still Dynamic 
------------------------------------------- 
 
¶3.  The Austrian Institute for Economic Research (WIFO) and the 
Institute for Advanced Studies (IHS) recently presented revised, 
upgraded projections for 2007 and 2008.  For 2007, WIFO now projects 
growth of 3.2%, IHS of 3.1%.  The growth is based on broad and 
balanced demand - strong exports, a robust investment cycle and 
continued improving private consumption.  Projections for 2008 are 
for slightly lower growth of 2.5-2.8% because of the expected 
slowing of the European economy, the weak U.S. economy and a 
slow-down in China, although the impact of the latter on Austria is 
limited.  The higher IHS growth forecast for 2008 results from more 
optimistic assumptions about the U.S. economy and its direct and 
indirect effects via Germany on the Austrian economy. 
 
¶4.  Both institutes upgraded their projections because of the 
Austrian economy's consitently strong dynamics, growing optimism 
from Austrian business, continued strong growth in the Euro area and 
vibrant growth in the key Austrian markets in Central and Eastern 
Europe.  According to WIFO Director Karl Aiginger und IHS Director 
Bernhard Felderer, the economy is currently doing better than 
expected.  Growth in 2008 will be slightly weaker, mainly because of 
cyclical reasons.  There are no signs of a downturn or major 
external shocks on the horizon. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶5.  The institutes based their revised 2007/2008 forecasts on the 
following assumptions: 
-- U.S. economic growth of 1.8-2.3% in 2007 and 2.1-3.0% in 2008; 
-- Euro area growth of 2.5-2.9% in 2007 and 2.3% in 2008; 
-- EU-27 growth of 2.8-3.1% in 2007 and 2.5% in 2008; 
-- German growth of 2.5-2.8% in 2007 and 2.2-2.5% in 2008; 
-- oil prices of $62-64 per barrel in 2007 and $64 in 2008; and 
-- dollar/Euro exchange rates of 0.75-0.76 in 2007 and 0.71-0.77 in 
¶2008. 
 
 
Unemployment Down to 4.2-4.3%, No Further Improvements 
--------------------------------------------- --------- 
 
¶6.  The robust economic growth continues to have a noticeable impact 
on the labor market.  The number of full-time jobs will rise by 
1.95% or 60,000 in 2007.  The number of unemployed should decline by 
15,000, with the unemployment rate easing to 4.3% from 4.8% in 2006. 
 Projected lower economic growth in 2008 will not produce further 
improvements on the labor market.  The unemployment rate will remain 
at 4.2-4.3% in 2008.  Since mid-term forecasts indicate average 
economic growth of 2.5%, economists expect the unemployment rate 
will remain at that level until 2011. 
 
 
Problem Areas the GoA Should Address 
 
VIENNA 00002001  002 OF 002 
 
 
------------------------------------ 
 
¶7.  Despite the current excellent economic performance, Aiginger and 
Felderer outlined several areas the GoA should concentrate on to 
keep the Austrian economy competitive: 
 
--  The GoA should pursue its plans outlined in the coalition 
program to implement initiatives to raise economic growth and reach 
full employment by 2010 through innovation, closing infrastructure 
gaps, administrative reform, education and training. 
 
--  The GoA should place additional emphasis on balancing the 
budget, primarily by cutting budget expenditures.  Aiginger and 
Felderer acknowledged the commitment of Vice-Chancellor and Finance 
Minister Wilhelm Molterer to only use windfall tax revenues for 
deficit reduction, not for additional spending programs.  Total 
public sector deficit will be 0.6-0.7% of GDP in 2007 instead of the 
budgeted 0.9%, and at 0.6% in 2008 instead of the budgeted 0.7% (ref 
B). 
 
--  The GoA and social partners (labor unions and business 
associations) should work towards introducing new flexible elements 
in the wage structrue, such as merit pay, incentive pay, premiums, 
profit shares, and employee shares.  Aiginger and Felderer urged a 
somewhat more liberal wage policy, noting that several years of 
robust economic growth and excellent business profits have led to 
only modest increases in inflation-adjusted per capita net wages. 
 
 
¶8.  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                  3.2      3.1        2.5      2.8 
Manufacturing        6.7      n/a        3.7      n/a 
Private consumption  2.2      2.3        2.1      2.2 
Public consumption   1.7      1.9        1.8      2.5 
Investment           6.0      5.6        3.8      4.1 
Exports of goods     8.7      8.5        7.2      8.3 
Imports of goods     8.4      8.5        6.6      7.8 
 
Nominal Euro billion 
equivalents: 
GDP                270.0    269.3      281.4    281.3 
 
Other indices: 
GDP deflator         1.9      1.8        1.7      1.6 
Consumer prices      1.8      1.8        1.9      1.6 
Unemployment rate    4.3      4.3        4.2      4.3 
Current account (in 
    percent of GDP)  3.8      n/a        4.1      n/a 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.75     0.76       0.71     0.77 
 
MCCAW