VZCZCXRO8046
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1484/01 2771434
ZNR UUUUU ZZH
R 031434Z OCT 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 1058
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES
RUEHFR/AMEMBASSY PARIS 0942

UNCLAS SECTION 01 OF 02 VIENNA 001484 
 
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: SOBER OUTLOOK FOR AUSTRIA'S ECONOMY IN 2009 
 
REF:  (A) VIENNA 1287; (B) VIENNA 0945; (C) VIENNA 0621 
 
 
¶1.  SUMMARY: Austria's economy started to weaken in the second 
quarter in reaction to the international downturn, now reinforced by 
the current financial crisis.  Austria's two leading economic 
institutes downgraded their 2008 GDP growth forecasts to 2.0%. 
Austria's economy is still driven by export growth, but at a much 
lower pace than in past years.  Private consumption is providing 
little stimulus, while manufacturing and investment are very weak. 
As a result, projections for 2009 growth were cut markedly to only 
0.9-1.2%.  Economists warned of major downside risks inherent in 
this projection and that the 2009 GDP growth could be flat. 
Unemployment will rise to 4.2-4.4% in 2009.  CPI inflation will ease 
from 3.4% in 2008 to 2.2-2.3% in 2009.  The 2008 budget deficit is 
forecast at 0.6% of GDP, but will rise to at least 1.0-1.2% in 2009, 
because of the weakening economy and new commitments by the outgoing 
GoA.  END SUMMARY. 
 
Marked Slowdown since the Second Quarter 
---------------------------------------- 
 
¶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 by 0.2-0.3 percentage point to 2.0% based on an 
unexpectedly weak second quarter and no outlook for improvement. 
The institutes assume the economy will slow further and bottom out 
towards the end of 2008. 
 
Tepid Growth of Around 1.0% in 2009 
----------------------------------- 
 
¶3.  The institutes revised downward significantly their 2009 growth 
forecast by 0.5-0.7 percentage points (WIFO to 0.9% and IHS to 
1.2%).  This reflects the impact on the Austrian economy of global 
weakening, reinforced by the financial crisis.  Analysts expect the 
economy to reach its low point at the turn of 2008/2009.  Absent any 
major stimulus from either exports, investments or private 
consumption, the economy will remain on a low growth level of only 
around one percent, at best.  Exports will continue to drive growth 
but at considerably lower rates than in past years due to weakness 
among major trading partners and Euro appreciation.  Investment 
spending, with its sensitive reaction to atmospherics and 
expectations, is projected to grow only 0-1.2% in 2009.  Private 
consumption growth remains sluggish at little more than one percent, 
reflecting a drop in real per capita after-tax net incomes in 
2007/2008.  The savings rate will remain above 11% of disposable 
income in both 2008 and 2009. 
 
¶4.  Neither WIFO Director Karl Aiginger nor IHS Director Bernhard 
Felderer spoke of a recession, but warned that the 2009 projections 
have major downward risks, which far outweigh chances for an upward 
revision.  Aiginger said odds are that the GDP growth rate will tend 
towards zero in 2009.  While Aiginger pleaded for a government 
stimulus package as soon as possible ((?)in late 2008 and early 
2009) and moving forward some of the planned income tax cut, 
Felderer saw no need for stimulus as long as growth does not fall 
below one percent.  Both advocated economic policy measures on the 
EU level. 
 
Assumptions for Growth Forecasts 
-------------------------------- 
 
¶5.  The institutes based their revised 2008/2009 forecasts on the 
following assumptions: 
 
-- U.S. economic growth of 1.7-1.8% in 2008 and 0.9-1.8% in 2009; 
-- Euro area growth of 1.2-1.5% in 2008 and 0.7-1.0% in 2009; 
-- EU-27 growth of 1.6-1.8% in 2008 and 1.0-1.3% in 2009; 
-- German growth of 1.8% in 2008 and 1.0% in 2009; 
-- Oil prices of $105-110 per barrel in 2008 and $90-95 in 2009; 
and 
-- Dollar/Euro exchange rates of 0.67 in 2008 and 0.71 in 2009. 
 
¶6.  Aiginger said that the economic weakening -- a spillover from 
the U.S. -- is hitting Europe harder than the U.S. due to the Fed's 
active monetary policy, USG fiscal measures to bolster consumption, 
and the export stimulus from the low dollar exchange rate.  In 
Europe, the crisis will be worse because of the high Euro exchange 
rate and the absence of coordinated economic policy measures at 
either the EU or national level, including Austria. 
 
 
VIENNA 00001484  002 OF 002 
 
 
Labor Market Turning Down Again in 2009 
--------------------------------------- 
 
¶7.  After record employment growth of 2.5% in 2008 and a resulting 
low unemployment rate of 3.9-4.1%, Austria's labor market in 2009 
will reflect the economic weakening.  The projected continued modest 
employment growth of about 0.5% will not match the stronger growth 
in labor supply, so that the unemployment rate will rise again to 
4.2-4.4% in 2009. 
 
Inflation Projected to Ease 
--------------------------- 
 
¶8.  Inflation is no longer a major concern since the forces driving 
it (fuel/food prices and the emerging markets boom) are weakening. 
Monthly inflation rates have edged down slightly since July and this 
trend is expected to last.  The institutes revised their projected 
annual average CPI increase marginally to around 3.4% in 2008 and 
lowered by 10-40 basis points the projected 2009 annual inflation 
rate, now expected at 2.2-2.3%.  The high 2008 inflation cut into 
private households' purchasing power, with sluggish private 
consumption growth.  Per capita pre-tax wages should increase 3.0% 
in 2008 and 3.3% in 2009, but real after-tax incomes, after 
stagnation in 2007, are forecast to decline 0.8% in 2008 and rise 
only 0.7% in 2009. 
 
Budget Deficit:  Stable in 2008, Rising in 2009 
--------------------------------------------- -- 
 
¶9.  The 2008 federal budget benefited from continued high tax 
revenues during the first half of the year, but Aiginger says the 
GoA will exhaust these revenues by its measures to compensate price 
increases (reftel C).  None of the windfall revenues were used for 
reducing the public sector deficit, which the institutes continue to 
expect at 0.6% of GDP in 2008.  Though the 2009 budget is not yet 
available,  the 0.2% of GDP deficit the outgoing GoA submitted to 
Brussels in November 2007 in its updated 2007-2010 stability program 
is obsolete because of the weakening economy and the pre-election 
package (ref A). WIFO and IHS expect a total public sector deficit 
of at least 1.0-1.2% in 2009.  Economists are concerned about this 
pre-election spending spree:  Felderer asked that the new GoA 
rethink and even reverse some of these measures.  The planned income 
tax cut of about 1% of GDP, whether in 2010 or moved up to 2009, is 
not yet included in these deficit figures.  Felderer opined that any 
new government will soon need to have budget consolidation on its 
agenda. 
 
¶10.  Statistical Annex 
 
                      Austrian Economic Indicators 
                   (percent change from previous year, 
                        unless otherwise stated) 
 
                    (all projected) 
                    WIFO     IHS      WIFO     IHS 
                    2008     2008     2009     2009 
Real terms: 
GDP                  2.0      2.0      0.9      1.2 
Manufacturing        3.2      n/a      0.5      n/a 
Private consumption  1.0      1.1      1.2      1.3 
Public consumption   1.0      2.5      1.0      0.3 
Investment           2.2      2.6      0.0      1.2 
Exports of goods     4.1      4.8      3.1      4.5 
Imports of goods     3.8      4.2      2.7      4.4 
 
Nominal Euro billion equivalent: 
GDP                284.2    283.3    293.3    292.9 
 
OTHER INDICES: 
GDP deflator         2.9      2.5      2.2      2.2 
Consumer prices      3.4      3.4      2.2      2.3 
Unemployment rate    3.9      4.1      4.2      4.4 
Current account (in 
    percent of GDP)  2.8      n/a      2.6      n/a 
 
Exchange rate for 
  US$ 1.00 in Euro   0.67     0.67     0.71     0.71 
 
GIRARD-DICARLO