Austria: Selected Issues

Abstract

The COVID-19 pandemic adversely affected the Austrian economy. Evidence from previous crises suggests that economic scarring is common and driven by labor market hysteresis, impaired corporate balance sheets, and deteriorating productivity. As the recovery takes hold, policies aiming at preventing potential rise in long-term unemployment, as well as addressing skills and regional mismatches can foster job creation and promote efficient reallocation of labor. Targeted equity-like instruments and an effective insolvency framework can help rehabilitate corporate balance sheets while allowing nonviable to efficiently exit the market. B. Austria's Economic Scarring: Lessons from the Past 1Economic scarring is common after a large crisis. Sources of economic scarring from the current pandemic could include: labor hysteresis from structural transformation which accelerated during the crisis, a potential rise in long-term unemployment, and deterioration in corporate balance sheets among others. Nonetheless, the unprecedented support could help mitigate economic scarring. Going forward, policies should aim at securing the recovery and facilitating the efficient reallocation of labor and capital through active labor market policies and solvency support for viable firms in order to replenish corporate balance sheets. 5.Previous studies show that economic scarring from a large crisis is common, but the magnitudes differ across crises. Many countries experience economic scarring-a persistent output loss compared to the pre-crisis trend-after a large crisis, such as the Asian crisis, the Global Financial Crisis (GFC), health crises, and civil wars. 2 The magnitudes of the losses varied greatly, ranging from less than 5 percent (currency crises and previous health crises) to over 10 percent (civil wars). Countries experiencing systemic banking crises, including the GFC, are shown to have a cumulative output loss of about 6 percent below the pre-crisis trend. 6.Supply, demand, and policy factors can all play a role in explaining economic scarring. 3 Supply factors include employment losses that do not recover later (labor market hysteresis) and deterioration in physical and human capital accumulation. Demand-side channels include persistently suppressed consumption and investment as a result of weakened household and corporate balance sheets and higher precautionary savings from heightened uncertainty. Policy factors-including fiscal and monetary policy-have been found to either mitigate or aggravate economic scarring. 7.This section assesses potential economic scarring from the current pandemic for Austria. The COVID-19 pandemic has been an unparalleled shock to the economy where the path of recovery is very uncertain. Nonetheless, reviewing channels of scarring from previous crises could provide helpful information as to how the pandemic could affect the economy in the medium term. The analysis presents the current impacts of the pandemic on Austria's economy and highlights 1 By Nujin Suphaphiphat 2 Shi and Suphaphiphat (for...