VZCZCXRO2214
RR RUEHIK
DE RUEHVI #0008/01 0070706
ZNR UUUUU ZZH
R 070706Z JAN 10
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 3949
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 000008 
 
SIPDIS 
 
TREASURY FOR OCC/SIEGEL AND OASIA/ICB/MAIER 
TREASURY PASS TO FEDERAL RESERVE AND SEC/E. JACOBS 
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: Austria's Economic Recovery Sure but Slow 
 
REF:  VIENNA 1269 
 
VIENNA 00000008  001.2 OF 002 
 
 
¶1. SUMMARY:  After the deepest recession in more than 50 years, 
Austria's economy has started to recover but the upward trajectory 
will be slow, with set-backs likely.  GDP will grow only around 1.5% 
in 2010 and 2011, insufficient to prevent unemployment rising to 
5.2-5.7%:  Economists say growth of 2% or more is nowhere on the 
horizon, meaning little or no improvement in Austria's labor market. 
 Despite its slow growth trajectory, the GoA will have to turn its 
attention to scaling back large deficits and the burgeoning public 
debt.  END SUMMARY. 
 
Economy Started Growing in Q3/2009 
- - - - - - - - - - - - - - - - - - 
 
¶2. Austria's Institute for Economic Research (WIFO) and Institute 
for Advanced Studies (IHS) recently issued revised growth 
projections for 2009 and 2010 and a first outlook for 2011.  The 
good news is that GDP shrank by "only" 3.4-3.7% in 2009 -- the 
deepest full-year recession in more than 50 years, but less severe 
than originally expected and less than the Eurozone average.  After 
four negative quarters, the Austrian economy grew in Q3/2009: 
   2008 Q3:  -0.7% 
        Q4:  -1.3% 
   2009 Q1:  -2.5% 
        Q2:  -0.4% 
        Q3:   0.5% 
        Q4:   Recovery (at about the Q3 rate) 
 
Modest Growth in 2010 and Beyond 
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¶3. WIFO and IHS expect growth of 1.3-1.5% in 2010, mainly reflecting 
Austrian exports to a recovering world economy.  Even with a 
projected real growth of 4-5.5% in 2010, exports will need years to 
offset the 17% slump of 2009 which brought exports down to their 
2005 level.  Private consumption, supported by high social transfers 
and an income tax cut and the main stimulus during the recession, 
will continue to grow at a modest rate.  Investment will be flat and 
may fall again since existing production capacity will remain 
underemployed.  For 2011, WIFO and IHS expect continued moderate 
growth of 1.6-1.7% with little upside. 
 
Bumpy Recovery, High Risks, Problem Areas 
- - - - - - - - - - - - - - - - - - - - - 
 
¶4. Senior economists Karl Aiginger (WIFO Director) and Bernhard 
Felderer (IHS Director) cautioned against exaggerating the upward 
trend, predicting that the recovery will be slow, bumpy, and beset 
with downside risks including financial instability, higher real 
interest rates, weak investment, and risks in Greece and some CESEE 
countries (notably Ukraine, Romania, Bulgaria and the Baltic 
states).  Aiginger, Felderer, and Austrian National Bank (OeNB) 
Governor Ewald Nowotny say 2% growth is nowhere in sight and that 
Austria's is on a lower potential growth path for the foreseeable 
future.  This means unemployment will persist at the 2011 level and 
remain a major economic policy problem alongside budget deficits and 
public debt. 
 
Underlying Assumptions 
- - - - - - - - - - - - 
 
¶5. The institutes based their forecasts on the following 
assumptions: 
 
                           --2010--    --2011-- 
    U.S. economic growth   1.7-2.4%    1.9-2.6% 
    Eurozone growth            1.1%    1.4-1.7% 
    EU-27 growth           0.9-1.1%    1.5-1.7% 
    German growth          1.4-1.5%    1.4-1.5% 
    oil price (barrel)      $80-85      $82-90 
    USD/Euro              0.67-0.68   0.65-0.70 
 
Consistent with International Forecasts 
- - - - - - - - - - - - - - - - - - - - 
 
¶6. WIFO and IHS projections track with other national and 
international forecasts: 
 
Austrian economic growth       2009   2010   2011 
 
OeNB                          -3.5%    1.2%   1.6% 
European Commission           -3.7%    1.1%   1.5% 
OECD                          -3.8%    0.9%   2.2% 
IMF                           -3.8%    0.3%    n/a 
 
VIENNA 00000008  002.2 OF 002 
 
 
Bank Austria                  -3.8%    1.3%    n/a 
 
Labor Market - No Turn-Around in Sight 
- - - - - - - - - - - - - - - - - - - - 
 
¶7. Since mid-2008, some 56,000 jobs have disappeared in Austria 
despite stimulus measures, labor market programs, and the bank 
rescue package.  With slow economic growth and the return to 
workforce of some 100,000 workers currently on reduced working hours 
or in training (not included in current unemployment statistics), 
the number of unemployed is projected to rise from an annual average 
of about 260,000 to about 300,000 in 2011.  Unemployment rates 
(Eurostat methodology) is projected to rise from 4.7-5.0% in 2009, 
to 5.2-5.4% in 2010 and 5.2-5.7% in 2011. 
 
Austria Needs Timetable for Decisive Budget Cuts 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶8.  WIFO and IHS project a total public sector deficit of 
4.1-4.2%/GDP in 2009, 5.2-5.3%/GDP in 2010 and 4.8-4.9%/GDP in 2011. 
 The OeNB forecast is more pessimistic:  4.2%/GDP in 2009, 5.3%/GDP 
in 2010 and 5.4%/GDP in 2011.  Total public sector debt will grow to 
c. 75-80%/GDP by 2011.  Senior economists agree on the need to 
reduce debt after the crisis, but say the economy will be too weak 
in 2010 to start budget consolidation. 
 
¶9.  Statistical Annex 
 
                            Projections of 
                      Austrian Economic Indicators 
                   (percent change from previous year, 
                        unless otherwise stated) 
 
                      WIFO     IHS      WIFO     IHS 
                      2010     2010     2011     2011 
REAL TERMS: 
GDP                    1.5      1.3      1.6      1.7 
Manufacturing          4.5      n/a      4.0      n/a 
Private consumption    0.7      0.6      0.9      1.1 
Public consumption     1.0      0.8      0.5      0.5 
Investment            -1.0      0.8      2.0      2.0 
Exports of goods       4.0      5.5      6.0      7.1 
Imports of goods       3.2      4.3      4.8      6.0 
 
Nominal EUR billion equivalent: 
 
GDP                  283.1    282.2    291.2    290.9 
 
OTHER INDICATORS: 
GDP deflator           0.7      1.1      1.3      1.3 
Consumer prices        1.3      1.1      1.5      1.4 
Unemployment rate      5.4      5.2      5.7      5.2 
Current account (in 
    percent of GDP)    2.4      n/a      2.7      n/a 
Exchange rate 
  (USD/EUR)            0.67     0.68     0.65     0.70 
 
EACHO