VZCZCXRO7067
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #0513/01 1051504
ZNR UUUUU ZZH
R 141504Z APR 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 9997
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 VIENNA 000513 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB (VIMAL ATUKORALA) 
TREASURY PLEASE PASS TO OCC (EILEEN SIEGEL) AND 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 GROWTH SLOWING AS CONCERN ABOUT INTERNATIONAL 
FINANCIAL CRISIS GROWS 
 
REF:  VIENNA 23 
 
 
Summary 
------- 
 
¶1.  Based on continuing uncertainty in international financial 
markets, Austria's two leading economic institutes have recently 
slightly reduced GDP growth forecasts for 2008 to 2.1%.  Exports 
will remain the driving force behind growth, as consumer spending 
remains sluggish.  Projections for 2009 growth rates are 1.7-2.2%. 
The Austrian economy continues to profit from strong growth in 
Central and Eastern Europe and Southeastern Europe (CEE/SEE).  With 
substantial investments in CEE/SEE and limited exposure to the U.S. 
real estate and financial markets, Austrian banks have only had to 
write off Euro one billion out of a total of Euro 875 billion in 
assets.  Unemployment should remain relatively low in 2008 at 4.2% 
and inflation, although creeping up somewhat, should remain low at 
2.6%-2.9%.  The budget deficit is forecast to rise from 0.5% of GDP 
to 0.7% of GDP in 2008.  Despite the small deficit, economists and 
the IMF have criticized the GoA for not reining in spending more 
during the recent period of strong growth in revenues.  End 
Summary. 
 
 
Slower Growth in 2008 
--------------------- 
 
¶2.  The Austrian Institute for Economic Research (WIFO) and the 
Institute for Advanced Studies (IHS) recently presented revised 
growth projections for 2008 and 2009.  Both institutes downgraded 
their 2008 forecasts to 2.1%, considerably less than the 3.4% 
recorded in 2007.  For the sixth consecutive year, Austria's growth 
rate should be at least half a percentage point above overall Euro 
area growth.  Exports continue to drive growth.  Investment spending 
remains disappointing and consumer spending is sluggish, reflecting 
stagnating real after-tax incomes in 2007 and 2008. 
 
 
2009 - Less Dynamic and Highly Uncertain 
---------------------------------------- 
 
¶3.  For 2009, the institutes shaved 0.3% off of their previous 
forecasts, with WIFO now at 1.7% and IHS at 2.2%.  IHS' higher 
projection reflects a more optimistic view of the global, and in 
particular of the U.S., economic situation.  Both institutes predict 
a slowdown in global growth in 2008.  WIFO assumes the U.S. economy 
will stabilize by mid-2008 with further improvement during 2009. 
IHS expects stronger growth in the U.S. and globally somewhat 
earlier, as Federal Reserve actions and the U.S. fiscal stimulus 
package take effect.  In 2008 and 2009, Austria will continue to 
greatly benefit from strong growth in the neighboring Central and 
East European and Southeast European countries (CEE/SEE). 
 
 
The Impact of the International Financial Crisis 
--------------------------------------------- --- 
 
¶4.  The downward revisions for 2008 and 2009 are based on 
uncertainty about the depth and duration of the ongoing 
international financial crisis.  WIFO Director Karl Aiginger und IHS 
Director Bernhard Felderer cautioned that their projections, 
particularly those for 2009, contained major uncertainties and 
downside risks.  According to the institutes, the Austrian economy 
remains robust with no present danger of recession.  Austrian 
financial institutions are somewhat protected against turbulence on 
the international financial markets because they have heavily 
invested in CEE/SEE, with minimal exposure to the U.S. subprime 
sector.  According to the Austrian National Bank, Austrian banks 
have only had to write-off Euro one billion in assets due to 
international exposure.  The ANB estimated total Austrian bank 
assets at more than Euro 875 billion at year-end 2007. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶5.  The institutes based their revised 2008/2009 forecasts on the 
following assumptions: 
-- U.S. economic growth of 1.0-1.8% in 2008 and 1.4-2.3% in 2009; 
-- Euro area growth of 1.6-1.7% in 2008 and 1.3-2.0% in 2009; 
-- EU-27 growth of 1.9-2.0% in 2008 and 1.6-2.3% in 2009; 
-- German growth of 1.4-1.7% in 2008 and 1.2-1.7% in 2009; 
-- oil prices of $95-96 per barrel in 2008 and $96-97 in 2009; and 
-- dollar/Euro exchange rates of 0.63-0.68 in 2008 and 0.63-0.70 in 
 
VIENNA 00000513  002 OF 003 
 
 
¶2009. 
 
 
Unemployment Down, But Only Through 2009 
--------------------------------------- 
 
¶6.  During 2005-2007, robust economic growth created 170,000 new 
jobs, with the unemployment rate declining from 5.2% in 2005 to 4.4% 
in 2007.  The forecast for 2008 GDP growth of 2.1% will bolster 
demand for labor, dropping the unemployment rate still further to 
4.2-4.3%.  However, economists predict that lower growth in 2009 
will lead to a turnaround on the labor market, as labor supply will 
again exceed demand with the unemployment rate stagnant at 
4.3-4.4%. 
 
 
Inflation Remains a Concern, But Wage Growth Slow 
--------------------------------------------- ---- 
 
¶7.  Inflation remains a concern, particularly since two-thirds of 
the CPI increase results from rising food, energy and housing 
prices.  In 2008, the institutes project an annual average CPI 
increase of 2.6-2.9% (up from the 2.2% in 2007), with food prices 
expected to rise 7% and energy prices even more.  Projected lower 
inflation in 2009 reflects a slowdown in growth and stabilization of 
energy and raw materials prices.  The projected 2009 CPI will remain 
above the European Central Bank's price stability goal of a maximum 
inflation of 2.0%.  Creeping inflation and higher social insurance 
contributions have had considerable impact on wages.  While average 
pre-tax wages rose 2.7% each in 2006 and 2007, real after-tax 
incomes rose only 0.5% in 2006 and 0.1% in 2007.  In 2008 and 2009, 
pre-tax wages should increase 3.3% and 3.0%, respectively, but real 
after-tax incomes are forecast to decline 0.1% in 2008 and rise only 
0.3% in 2009. 
 
 
IMF: GoA Should Do More to Balance Budget 
----------------------------------------- 
 
¶8.  Preliminary figures show the 2007 total public sector deficit at 
0.5% of GDP, down from 1.5% in 2006.  Total budget revenues were 
Euro 3.8 billion (+5.7%) higher than budgeted, but expenditures were 
also up Euro 2.7 billion (+4.0%).  Economists have criticized the 
GoA for spending most of the windfall revenues without moving to cut 
expenditures.  Aiginger predicted that the deficit would increase 
again to at least 0.7% of GDP in 2008.  Felderer was more 
pessimistic, characterizing as highly unlikely the GoA's plan to 
achieve a budget surplus in 2010.  According to the IMF's 
preliminary conclusions from its recent Article IV consultations 
with Austria, the GoA has not done enough on budget consolidation 
during the recent years of strong economic growth.  The IMF added 
that "current policies, were unlikely to deliver a balanced budget 
by 2010... and that consolidation measures should be implemented 
sooner rather than later." 
 
 
¶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                  2.1      2.1        1.7      2.2 
Manufacturing        3.0      n/a        2.8      n/a 
Private consumption  1.6      1.6        1.6      1.8 
Public consumption   2.5      3.0        1.0     -0.5 
Investment           2.2      2.7        1.8      2.6 
Exports of goods     5.7      6.0        5.7      7.0 
Imports of goods     5.8      6.6        5.7      6.5 
 
Nominal Euro billion 
equivalents: 
GDP                285.8    284.8      296.9    296.4 
 
Other indices: 
GDP deflator         2.6      2.2        2.1      1.9 
Consumer prices      2.9      2.6        2.3      1.9 
Unemployment rate    4.2      4.3        4.3      4.4 
Current account (in 
    percent of GDP)  3.0      n/a        2.9      n/a 
 
VIENNA 00000513  003 OF 003 
 
 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.63     0.68       0.63     0.70 
 
KILNER