VZCZCXYZ0008
RR RUEHWEB

DE RUEHVI #0954/01 1851519
ZNR UUUUU ZZH
R 031519Z JUL 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 0492
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS VIENNA 000954 
 
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:  INFLATION AND INTERNATIONAL FINANCIAL CRISIS DAMPEN 
AUSTRIA'S 2008/2009 ECONOMIC GROWTH OUTLOOK 
 
REF:  (A) VIENNA 0621; (B) VIENNA 0513 
 
Summary 
------- 
 
¶1.  Austria's economy is starting to feel the impact of the 
international financial crisis and the high inflation resulting from 
continued raw materials and energy price hikes.  Due to a still 
strong first quarter performance, Austria's two leading economic 
institutes recently upgraded GDP growth forecasts for 2008 to 
2.2-2.3%.  The Austrian economy continues to profit from strong 
exports, which are, however, weakening as are manufacturing and 
investments.  Projections for 2009 are for growth of only 1.4-1.9%. 
Unemployment should remain at 4.2% in 2008 and rise only slightly to 
4.3-4.4% in 2009.  Economists are concerned about the high inflation 
rate.  The 2008 budget deficit is forecast at 0.6% of GDP, but 
economists are less optimistic on the 2009 and 2010 budget outlook. 
End Summary. 
 
 
Slowdown in the Second Half of 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 upgraded 
their 2008 forecasts by 0.1-0.2 percentage point to 2.2% (IHS) and 
2.3% (WIFO) because of an unexpectedly strong first quarter 
performance (annual growth rate of 3.3%).  A recent Austrian 
National Bank (ANS) forecast also predicts 2.2%, a rate at which 
Austria's growth for the sixth consecutive year will have exceeded 
the expected Euro area growth by half a percentage point.  However, 
available indicators point to a marked slowdown in the second half 
of the year, but with no danger of a recession.  Exports continue to 
drive growth, but will expand at considerably lower rates than in 
past years due to the weak economies of major trading partners and 
the euro's appreciation.  Investment spending is weakening and 
private consumption remains sluggish, reflecting a drop in real per 
capita after-tax net incomes in 2007.  The savings rate will remain 
slightly above 10% of disposable income in both 2008 and 2009. 
 
 
2009 - Less Than 2.0% Growth and Highly Uncertain 
--------------------------------------------- ---- 
 
¶3.  For 2009, the institutes again downgraded their forecasts by 0.3 
percentage points, WIFO to 1.4% and IHS to 1.9%.  The higher IHS 
projection reflects a more optimistic view of international 
developments and all demand aggregates.  The ANB forecast is for 
1.7%.  This is a marked slowdown compared to the 3.4% growth in 2007 
and the 2009 growth projections of 2.0-2.5% only six months ago. 
Both institutes conceded that the 2009 forecast contains major 
uncertainties, particularly the high volatility of raw material 
prices, exchange rates and financial markets.  WIFO was unable to 
project the duration of the slowdown; the IHS saw chances for a new 
cycle to start in 2010. 
 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶4.  The institutes based their revised 2008/2009 forecasts on the 
following assumptions: 
-- U.S. economic growth of 1.4-1.5% in 2008 and 1.4-1.8% in 2009; 
-- Euro area growth of 1.7-1.8% in 2008 and 1.1-1.5% in 2009; 
-- EU-27 growth of 2.0% in 2008 and 1.4-1.7% in 2009; 
-- German growth of 2.0% in 2008 and 1.1-1.5% in 2009; 
-- oil prices of $117-120 per barrel in 2008 and $117-130 in 2009; 
and 
-- dollar/Euro exchange rates of 0.64-0.65 in 2008 and 0.63-0.69 in 
¶2009. 
 
 
Labor Market Turnaround in 2009 
------------------------------- 
 
¶5.  Austria's unemployment rate of 4.4% in 2007 was the sixth lowest 
within the EU-27, its employment rate of 71.4% the fourth highest. 
The outlook for economic growth of 2.2-2.3% in 2008 will bolster 
labor demand, dropping the unemployment rate to 4.2%.  However, 
economists expect the slower 2009 growth will lead to a turnaround 
on the labor market, labor supply will again exceed demand and the 
unemployment rise to 4.3-4.4%. 
 
 
 
Inflation - A Growing Concern, Wage Development Meager 
--------------------------------------------- --------- 
 
¶6.  Inflation remains a concern, particularly in view of a 3.7% rate 
in May 2008, the highest monthly rate in fifteen years.  The 
institutes raised by 0.6 percentage point their projected annual 
average CPI increase to 3.2-3.5%, with food prices expected to go up 
7% and energy prices 13%.  The projected lower 2009 inflation of 
2.3-2.7% reflects less dynamic economic growth and a stabilization 
of energy and raw materials prices.  High inflation will also affect 
private households' purchasing power, explaining the sluggish 
private consumption growth.  In 2008 and 2009, per capita pre-tax 
wages should increase 3.3% and 3.5%, respectively, but real 
after-tax incomes are forecast to decline 0.7% in 2008 and rise only 
0.4% in 2009. 
 
 
Stable Deficit in 2008, But Uncertain 2009/10 Outlook 
--------------------------------------------- -------- 
 
¶7.  The 2008 federal budget benefitted from continued high tax 
revenues during the first half of the year.  However, additional 
revenues will be used up by the GoA's measures to combat rising 
inflation, i.e., the lowering of unemployment insurance 
contributions for low income groups and moving forward by two months 
to November 1, 2008 the annual pension increase (reftel A).  WIFO 
expects the GoA to meet its public sector deficit goal of 0.6% of 
GDP in 2008.  For 2009, no budget is available yet.  However, 
because of the slowing economy, WIFO expects a public sector deficit 
of 0.8% for 2009, IHS of 0.4% - in any case worse than the figures 
the GoA submitted to Brussels in November 2007 in its updated 
2007-2010 stability program, which projects a deficit of 0.2% of GDP 
in 2009 and a surplus of 0.4% in 2010.  Economists are highly 
skeptical that the GoA will be able to render the projected surplus 
in 2010. 
 
 
¶8.  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                  2.3      2.2        1.4      1.9 
Manufacturing        3.8      n/a        2.2      n/a 
Private consumption  1.1      1.4        1.2      1.5 
Public consumption   2.5      3.0        1.0      0.0 
Investment           2.4      2.5        1.0      2.1 
Exports of goods     5.0      5.6        4.8      5.4 
Imports of goods     4.3      6.1        4.3      5.0 
 
Nominal Euro billion 
equivalents: 
GDP                286.5    285.5      297.4    296.6 
 
Other indices: 
GDP deflator         2.7      2.5        2.3      2.0 
Consumer prices      3.5      3.2        2.7      2.3 
Unemployment rate    4.2      4.2        4.4      4.3 
Current account (in 
    percent of GDP)  2.8      n/a        2.6      n/a 
Exchange rate for 
    US$ 1.00 in Euro 
                    0.64     0.65       0.63     0.69 
 
GIRARD-DICARLO