VZCZCXRO7783
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #0402/01 0921442
ZNR UUUUU ZZH
R 021442Z APR 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 2245
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 VIENNA 000402 
 
SIPDIS 
 
TREASURY FOR FTAT, OCC/SIEGEL, OASIA/ICB/ATUKORALA 
TREASURY PASS FEDERAL RESERVE, FINCEN, SEC/JACOBS 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
USDOC PASS TO OITA 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB EUN AU
SUBJECT: Austrian Recession Deep, Budget Deficit 
Wide 
 
REF:  (A) VIENNA 0365; (B) VIENNA 0329; 
      (C) VIENNA 0296; (D) 08 VIENNA 1889 
 
¶1.  SUMMARY: Austria's export-oriented economy has 
plunged into a much deeper recession than expected 
but will still outperform Germany.  Leading Austrian 
forecasters have drastically downgraded their GDP 
growth forecasts for 2009 (now projected to contract 
by 2.2-2.7%).  The recession is severe and 
persistent and affects all sectors of the economy: 
exports and investments are shrinking, with private 
consumption growth as a meager stabilizer.  For 
2010, economic institutes project stagnation. 
Inflation is not on the horizon.  Unemployment will 
rise to 5.0-5.3% in 2009 and 5.8-6.1% in 2010.  The 
budget deficit will rise drastically from 0.3% of 
GDP in 2008 to 3.5-4.0% in 2009/2010.  END SUMMARY. 
 
Disastrous Fourth Quarter, Now Sharp Recession 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶2.  Like much of Europe, the highly export-oriented 
Austrian economy plunged into recession in the 
fourth quarter of 2008 and has performed much worse 
than expected (ref B).  The Austrian Institute for 
Economic Research (WIFO) and the Institute for 
Advanced Studies (IHS) on March 27 presented 
drastically downscaled GDP projections for 2009 and 
¶2010.  The institutes had projected quasi-stagnation 
(0.1-0.5%) and now foresee contraction of 2.2-2.7%. 
Austria's economy is still expected to outperform 
the Eurozone (projected to shrink between 3-3.5%) in 
¶2009. 
 
¶3.  Austria's economy has been hit by the recession 
in the U.S., Japan, the EU and now CESEE economies 
(ref C).  Recession was late to hit Austria and was 
still gaining negative momentum in the first 
quarter, with a sharp drop in both exports and 
investment.  A meager positive contribution will 
come from private consumption, supported by a real 
3.6% increase in per capita after tax incomes due to 
last year's wage increases, declining inflation and 
the upcoming income tax cut.  The recession is deep 
and affects all sectors of the economy, particularly 
industrial production.  Economists expect a very bad 
first half with a nadir in the summer. 
 
¶4. The Austrian economy should stabilize by the end 
of the year given the size of GoA stimulus measures 
which together with the upcoming income tax cut 
(retroactive to January 1, 2009) equal 1.5% of GDP 
and are larger than in most European economies.  An 
inflection point will come in the second quarter, 
when the GoA stimulus packages and income tax cut 
should show first effects.  Both WIFO Director Karl 
Aiginger and IHS Director Bernhard Felderer 
advocated speeding up implementation of the 
stimulus.  Inflation will be no problem in 
2009/2010. 
 
Stagnation in 2010 
- - - - - - - - - - 
 
¶5.  After stabilizing in the second half of 2009, 
the economy will basically stagnate in 2010.  The 
institutes cut their growth expectations for 2010 
and now expect modest growth of 0.4-0.5%, instead of 
the 0.9-1.3% growth projected three months ago. 
 
Downward Risks Predominate 
- - - - - - - - - - - - - - 
 
¶6.  While he has been overly optimistic until now, 
Aiginger expressed confidence that the new forecast 
will hold -- unless there is another dramatic 
deterioration of the international environment. 
Felderer said the IHS is less optimistic and that 
further revisions would most likely be downward. 
Felderer did acknowledge signs of cautious optimism 
in financial markets (ref A). 
 
Assumptions for Growth Forecasts 
- - - - - - - - - - - - - - - - - 
 
VIENNA 00000402  002 OF 003 
 
 
 
¶7.  The institutes based their revised 2009/2010 
forecasts on the following assumptions: 
-- U.S. economic growth of -2.7% to -3.0% in 2009 
and 0.5-1.0% in 2010; 
-- Eurozone growth of -3.0% to -3.5% in 2009 and 
0.0-0.5% in 2010; 
-- EU-27 growth of -3.0% to -3.3% in 2009 and 0.0- 
0.5% in 2010; 
-- German growth of -3.5 to -4.3% in 2009 and 0.0- 
0.5% in 2010; 
-- oil prices of $44-45 per barrel in 2009 and $55- 
60 in 2010; and 
-- USD/EUR exchange rate of 0.77-0.80 in both 2009 
and 2010. 
 
¶8.  Like the IMF and World Bank, Austrian 
forecasters see world economic growth as negative 
(minus 1.0%) in 2009 for the first time since WWII. 
Aiginger expects the U.S. economy to recover faster 
and do better than Europe in both 2009 and 2010 due 
to the massive USG fiscal stimulus and aggressive 
monetary policy.  Felderer opined that Europe should 
not copy everything the U.S. does.  Both Aiginger 
and Felderer criticized international rating 
agencies for irresponsible messaging, which has 
caused the GoA (despite its strong economic data) to 
pay higher interest rates for bond issues on 
international markets than other European countries. 
Austria's mere vicinity to CESEE should not trigger 
higher interest spreads, they said. 
 
Labor Market Downturn, Strong Rise in Unemployment 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶9.  The recession will cause a German-style downturn 
in Austria's labor market.  After record employment 
growth of 2.4% in 2008 and a resulting low 
unemployment rate (about 3.5%), Austria's labor 
market in 2009 will see shrinking employment (-1.1%) 
and a parallel rise in the number of unemployed by a 
quarter or at least 53,000 for an annual average of 
265,000 in 2009 and close to 300,000 in 2010.  Thus, 
the institutes now project an unemployment rate of 
5-5.3% in 2009 and of 5.8-6.1% in 2010, with not 
much relief expected in 2011.  In addition, Austria 
will have some 40,000 industrial workers on reduced 
working hours and 50,000 in training.  Since 
Austria's unemployment does not fall unless economic 
growth tops 2.5%, economists see unemployment as the 
most pressing economic policy issue in Austria; 
without decisive measures, Austria could end up with 
"sawtooth" rises in unemployment as in post- 
reunification Germany. 
 
Budget Deficit Close to 4% of GDP 
- - - - - - - - - - - - -- - - - - 
 
¶10.  Finance Minister Josef Proell has publicly 
abandoned the GoA budget deficit target for 2009 
(2.5% of GDP).  No new government projection is 
available.  After a lower than expected total public 
sector deficit (0.3%/GDP) in 2008, WIFO and IHS now 
project a deficit of 3.3-3.5% in 2009 and 4% in 
¶2010.  Aiginger and Felderer endorsed GoA 
stabilization measures and the resulting higher 
budget deficit, but advocated moving now to reduce 
the deficit as growth returns, for instance by 
implementing stalled administrative reforms.  FinMin 
Proell will submit the 2009 federal government 
budget on April 21; final approval by Parliament is 
scheduled for May 29. 
 
¶10.  Statistical Annex 
 
                            Projections of 
             Forecasted Austrian Economic Indicators 
                 (percent change from previous year, 
                        unless otherwise stated) 
 
                      WIFO     IHS      WIFO    IHS 
                      2009     2009     2010    2010 
Real terms: 
GDP                   -2.2     -2.7      0.5     0.4 
 
VIENNA 00000402  003 OF 003 
 
 
Manufacturing         -5.5      n/a      0.5     n/a 
Private consumption    0.4      0.4      0.8     0.4 
Public consumption     0.5      0.3      1.0     0.0 
Investment            -5.9     -6.3     -0.6    -1.9 
Exports of goods      -7.0     -9.5      0.5     2.8 
Imports of goods      -5.0     -6.7      0.3     1.5 
 
Nominal EUR billion: 
GDP                  280.1    278.7    283.9   282.5 
 
Other Indices: 
GDP deflator           1.4      1.5      0.8     0.9 
Consumer prices        0.6      0.9      1.1     1.4 
Unemployment rate      5.0      5.3      5.8     6.1 
Current account (in 
    percent of GDP)    1.6      n/a      1.3     n/a 
Exchange rate          0.80     0.77     0.80   0.77 
  (US$/EUR) 
 
KILNER