VZCZCXRO4990
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #0023/01 0041822
ZNR UUUUU ZZH
R 041822Z JAN 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 9280
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
RUEHFR/AMEMBASSY PARIS 0849

UNCLAS SECTION 01 OF 02 VIENNA 000023 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY PLEASE PASS TO OCC/EILEEN SIEGEL 
TREAUSRY PLEASE PASS TO FEDERAL RESERVE 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER AND OITA 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: AUSTRIA'S 2008/2009 ECONOMIC OUTLOOK - GROWTH SLOWING, BUT 
ABOVE EURO-ZONE AVERAGE 
 
REF:  A) 07 VIENNA 2636  B) 07 VIENNA 0979 
 
 
Summary 
------- 
 
¶1.  Austria's leading economic institutes - the Austrian Institute 
for Economic Research (WIFO) and the Institute for Advanced Studies 
(IHS) -- have announced that in 2007 Austria's GDP grew at a rate of 
3.3-3.4%.  However, with a slowdown in the fourth quarter and with 
slower global growth on the horizon, both institutes are revising 
downward their 2008 growth forecasts to 2.2-2.4%.  Exports will 
continue to drive growth, while consumer spending will remain weak. 
Projections for 2009 are for GDP growth of 2.0-2.5%.  In 2008/2009, 
Austria's growth rate will be higher than the Euro area average. 
Austria's 2007 unemployment rate of 4.3% will not decline further in 
2008/09.  The public sector deficit improved to 0.6% of GDP in 2007. 
 However, WIFO and IHS criticized rising government spending and the 
GoA's failure to balance the budget over the cycle.  End Summary. 
 
 
2007 Much Better Than Expected 
------------------------------ 
 
¶2.  The Austrian Institute for Economic Research (WIFO) and the 
Institute for Advanced Studies (IHS) recently presented revised 
growth figures for 2007.  Both institutes highlighted that the 2007 
growth rate of 3.3-3.4% was much higher than originally expected. 
Exports continued to propel GDP growth, sparking robust investment 
spending.  However, consumer spending, in contrast to previous 
periods of high growth, remained sluggish.  The consumer inflation 
rate in 2007 was 2.1-2.2% and the unemployment rate was 4.3%. 
 
 
2008 and 2009 - Less Dynamic Growth 
----------------------------------- 
 
¶3.  The institutes also presented a slightly downgraded forecast for 
2008 and an initial forecast for 2009.  Both institutes revised 
downward their 2008 growth forecasts slightly to 2.2-2.4%.  The 
forecast assumes continued strong export growth, but cyclically 
weaker investment and growth in consumer spending of less than 2%. 
Austria continues to benefit enormously from high growth rates in 
Central and Eastern Europe (CEE).  Nevertheless, both institutes 
acknowledged that export opportunities in the CEE would not fully 
compensate for the negative effects of an expected slowdown in the 
U.S. economy.  Slower global GDP growth and a strong Euro should 
reduce Austrian export growth in 2008/2009 to 6.3-6.6%, compared to 
export growth of 7.0-8.0% in 2006/2007. 
 
¶4.  Initial projections for 2009 are for GDP growth of 2.0% (WIFO), 
2.5% (IHS), and 2.3% (Austrian National Bank).  The WIFO believes 
that continued weakness in the U.S. economy and slowing growth in 
the EU justify a lower GDP figure for 2009.  The IHS, on the 
contrary, is more optimistic that the U.S. economy will begin to 
improve by the second half of 2008, followed by stronger growth in 
¶2009.  Thus, the IHS does not expect a further slowing of the 
Austrian economy in 2009. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶5.  The institutes based their 2008/2009 forecasts on the following 
assumptions: 
-- U.S. economic growth of 1.6-2.3% in 2008 and 1.7-2.7% in 2009; 
-- Euro area growth of 1.9-2.0% in 2008 and 1.7-2.3% in 2009; 
-- EU-27 growth of 2.3% in 2008 and 2.1-2.5% in 2009; 
-- German growth of 1.8-2.0% in 2008 and 1.8-2.3% in 2009; 
-- oil prices of $85 per barrel in 2008 and $80-88 in 2009; and 
-- dollar/Euro exchange rates of 0.66-0.70 in 2008 and 0.65-0.72 in 
¶2009. 
 
 
Risks: U.S. Economy, Financial Crisis, Exchange Rates 
--------------------------------------------- -------- 
 
¶6.  According to both WIFO Director Karl Aiginger und IHS Deputy 
Director Ulrich Schuh, despite slower growth in 2008, there are no 
indications of a serious slowdown or even a recession.  However, the 
2008 forecasts include the following downside risks: 
 
-- a "hard landing" for the U.S. economy; 
 
VIENNA 00000023  002 OF 002 
 
 
-- continued turbulence on international financial markets; 
-- a further appreciation of the Euro vis-a-vis the dollar, as well 
as against the yen and yuan; and 
-- accelerating consumer price inflation. 
 
 
Unemployment Stable at 4.2-4.3% 
------------------------------- 
 
¶7.  Robust economic growth created approximately 64,000 new jobs in 
2007, with an unemployment rate of 4.3%.  WIFO noted that continued 
growth in the supply of labor prevented a more pronounced drop in 
the unemployment rate.  New workers entering the labor market filled 
the bulk of additional labor demand, with unemployed accounting for 
only 25% of the total.  In 2008 and 2009, the unemployment rate 
should remain at 4.3%.  About half of the labor demand in 2008/09 
will be filled by additional foreign labor. 
 
 
Deficit Down, Budgetary Performance Could Be Better 
--------------------------------------------- ------ 
 
¶8.  Strong economic growth in 2007 produced much higher than 
expected tax revenues, particularly higher corporate tax and VAT 
revenues.  Given the higher revenues, WIFO and IHS expect the total 
public sector deficit to be only 0.6-0.7% of GDP.  Aiginger and 
Schuh noted that the GoA has not made sufficient progress in 
balancing the budget over the cycle.  They criticized the new GoA 
spending, as well as a lack of sufficient budgetary discipline on 
both the federal and provincial levels.  According to the Federal 
Debt Committee, the public sector debt level will fall from 61.7% of 
GDP in 2006 to 59.9% in 2007 and further to 58.4% in 2008. 
 
 
¶9.  Statistical Annex 
 
 
                      Austrian Economic Indicators 
                   (percent change from previous year, 
                        unless otherwise stated) 
 
                    WIFO     IHS      WIFO      IHS 
                    project. project. project.  project. 
                    2008     2008     2009      2009 
Real terms: 
GDP                  2.2      2.4        2.0      2.5 
Manufacturing        3.3      n/a        3.0      n/a 
Private consumption  1.9      1.8        1.9      1.9 
Public consumption   3.0      3.0        1.0     -0.5 
Investment           2.5      3.0        1.9      2.8 
Exports of goods     6.3      6.6        6.0      7.4 
Imports of goods     6.2      6.8        5.9      6.2 
 
Nominal Euro billion 
equivalents: 
GDP                285.3    284.0      296.7    296.0 
 
Other indices: 
GDP deflator         2.3      2.0        2.0      1.7 
Consumer prices      2.6      2.4        2.1      1.6 
Unemployment rate    4.2      4.3        4.3      4.3 
Current account (in 
    percent of GDP)  3.3      n/a        3.4      n/a 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.66     0.70       0.65     0.72 
 
KILNER