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R 021123Z OCT 09
FM AMEMBASSY VIENNA
TO SECSTATE WASHDC 3395
INFO DEPT OF TREASURY WASHDC
USDOC WASHDC
EU MEMBER STATES

UNCLAS VIENNA 001269 
 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB/PETER MAIER 
TREASURY PASS FEDERAL RESERVE 
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: Austria Economic Outlook - Bottom Reached, Modest Growth in 
2010 
 
REF:  (A) VIENNA 0856; (B) VIENNA 1081 
 
 
¶1. SUMMARY:  Austria's economy will post a deep recession for 2009, 
but economists expect stabilization in the second half and are 
increasingly optimistic for 2010 (growth of 1.0%).  Government 
stimulus must continue in order not to stifle the weak recovery. 
Pressure on the labor market will persist, unemployment will rise to 
5.0-5.3% in 2009 and 5.8% in 2010.  Inflation is not on the horizon. 
 The GoA's large stimulus will push the budget deficit to 4.5%/GDP 
in 2009 and 5.5%/GDP in 2010.  Economists want the GoA to develop a 
roadmap to cut the deficit and reduce Austria's public debt level 
after the crisis.  END SUMMARY. 
 
Economy Reached the Bottom in Q3/2009 
- - - - - - - - - - - - - - - - - - - 
 
¶2. After Austria's worst recession since WWII, the economy seems to 
have bottomed out in Q3/2009 and is starting to recover according to 
WIFO (Austrian Institute for Economic Research) Director Karl 
Aiginger and IHS (Institute for Advanced Studies) Director Bernhard 
Felderer.  Aiginger and Felderer warned that the recovery will be 
slow and bumpy.  WIFO stands by its projection for GDP to shrink by 
3.4% in 2009, while IHS foresees -3.8% in 2009 (revised from -4.3% 
three months ago). 
 
¶3. Forecasts for full-year 2009 are for exports of goods to drop 
14-15% (real terms), imports by 11-12%, investment by 8-11%, private 
consumption is projected grow by 0.2-0.3% and public consumption by 
0.8-1.0%.  Neither inflation nor deflation are on the horizon.  As a 
result of the GoA's income tax cut, real per capita after-tax net 
incomes will rise 3.0% in 2009, but will be partly offset by 
shrinking employment.  The savings rate will reach around 12.7% of 
disposable income in 2009. 
 
Modest Growth in 2010 and Beyond 
- - - - - - - - - - - - - - - - - 
 
¶4. IHS and WIFO no longer expect stagnation in 2010. Exports will 
grow again in 2010 (due to worldwide stimulus measures) after a 
sharp contraction in 2009.  Imports will grow at a lower rate, 
making Austria's current account balance positive again.  Investment 
(at least replacement investment) is expected to increase based on 
improved financing conditions and tax breaks, but continued 
overcapacity will make industry reluctant to make new investments. 
Private consumption will grow (0.5%) and provide continued stimulus 
along with public consumption.  Economists do not expect a 
significantly higher economic growth rate in 2011 or 2012. 
 
¶5.  While the crisis of production and output will be "over" in 
2010, unemployment is expected to keep rising through late 2010) 
along with the GoA deficit (which will be even higher next year) and 
public debt level, which will keep rising beyond 2010.  Aiginger and 
Felderer stressed the continued important role of economic stimulus 
-- Austria's recovery is not yet self-supporting -- urging the GoA 
to fully implement legislated measures and warning that an early end 
to stimulus measures could destroy the weak recovery. 
 
Underlying Assumptions 
- - - - - - - - - - - - 
 
¶6. The institutes based their revised 2009/2010 forecasts on the 
following assumptions: 
 
                             2009   2010 
    U.S. economic growth    -2.7%   1.0-1.7% 
    Eurozone growth       c.-4.0%   .6-1.0% 
    EU-27 growth          c.-4.0%   .8-1.0% 
    German growth     -5.0%   1.0-1.2% 
    oil price (barrel)     $60-61    $75-80 
    USD/Euro              .71-.72   .67-.74. 
 
Labor Market - No Turn-Around in Sight 
- - - - - - - - - - - - - - - - - - - - 
 
¶7. Since the beginning of the year, the number of unemployed has 
risen strongly.  In August 2009, the number of employed was 2.0% 
below the comparable 2008 figure.  According to Aiginger and 
Felderer, the employment decline has not yet reached the bottom and 
will continue for several more months; unemployment will continue to 
rise in 2010 - it usually peaks 1.5-2 years after an economic crisis 
begins.  In 2009, economists project employment to shrink 1.5% and 
the number of unemployed to rise by close to 30% or 55,000-60,000 
for an annual average of around 270,000 (2008: 212,000).  For 2010, 
the institutes project employment to shrink 1.0% and the number of 
unemployed to rise by 13% or 30,000 for an annual average of 
303,000-306,000.  The projected unemployment rates are 5.0-5.3% in 
2009 and 5.8% in 2010, with not much relief expected in 2011.  In 
addition to those included in the unemployment statistics, Austria 
will have an additional 100,000 workers on reduced working hours or 
in training. 
 
Budget Deficit: 4.5%/GDP in 2009, 5.5% in 2010 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶8. The cost of large GoA stimulus measures, bank rescue package, and 
automatic stabilizers lead WIFO and IHS to project a total public 
sector deficit of 4.5% in 2009 and 5.4-5.7% in 2010.  These deficits 
will bring the total public sector debt to around 75%/GDP by 2010 
and 80%/GDP by 2011.  Economists concur on the need to reduce the 
debt level after the crisis but say that the economy will be too 
weak in 2010 to begin consolidation.  Aiginger and Felderer urged 
the GoA to set out an austerity roadmap concentrating on 
expenditures (because spending cuts are more effective and 
long-lasting than revenue measures).  Given Austria's already high 
tax quota, revenue increases should be the last resort.  The ECB's 
strong price stability anchor means that inflation will not help 
much to reduce public debt. 
 
¶9. COMMENT:  Given the size of the deficit and a debt repayment 
requirement of around EUR 60 billion (to reduce the public debt 
level from 80%/GDP to 60%/GDP) we are not optimistic that the GoA 
will be able to consolidate without tax increases.  END COMMENT. 
 
¶10.  Statistical Annex 
 
                            Projections of 
                      Austrian Economic Indicators 
                   (percent change from previous year, 
                        unless otherwise stated) 
 
                      WIFO     IHS      WIFO     IHS 
                      2009     2009     2010     2010 
Real terms: 
GDP                   -3.4     -3.8      1.0      1.0 
Manufacturing         -9.5      n/a      1.5      n/a 
Private consumption    0.2      0.3      0.5      0.5 
Public consumption     0.8      1.0      1.5      0.8 
Investment            -8.0    -10.8     -0.1     -0.2 
Exports of goods     -15.1    -16.0      2.0      4.5 
Imports of goods     -11.2    -13.5      2.0      3.5 
 
Nominal Euro billion equivalents: 
GDP                  277.6    275.2    282.7    280.7 
 
OTHER INDICES: 
GDP deflator           1.9      1.5      0.9      1.0 
Consumer prices        0.5      0.6      1.3      1.4 
Unemployment rate      5.3      5.0      5.8      5.8 
Current account (in 
    percent of GDP)    1.9      n/a      1.9      n/a 
Exchange rate 
  (US$ / Euro)         0.71     0.72     0.67     0.74 
 
EACHO