Annex 1. Potential Output in Austria: Structural Shifts1
This Annex derives an estimate of potential output in Austria and selected euro area countries using a production function approach to shed light on the determinants of medium-term growth in the country.
Methodology: Potential output in Austria is estimated using a production function approach, in which trends in labor force participation, worked hours, and employment are estimated separately. The starting point is a Cobb-Douglas production function with constant returns to scale,
where Y is real GDP, A is total factor productivity (TFP), K is the stock of physical capital, H is total hours worked, and α is the share of GDP paid to capital, set at 0.3 for Austria based on historical data and previous studies.2 Total hours worked are:
H = WAP * LFPR * ER * AHW
where WAP is working-age population, LFPR is the labor force participation rate, ER is the employment rate, and AHW is average hours worked per worker. Taking logs of (1), and denoting the logs by lower case,
TFP can be derived as a residual from (2):
To derive potential output growth, an HP filter (assuming a smoothing parameter of 100—the usual value for annual frequency data) is used to smooth the factor inputs that exhibit cyclical behavior, namely the labor force participation rate, the employment rate, and average working hours.3 Since HP-filtered data are sensitive to end-point conditions, the sample period is artificially prolonged through a path for TFP and factor inputs reflecting a recovery from the 2009 recession. The data are then HP-filtered using the extended sample. The smoothed or trend values are denoted by bars. These values are used to derive the trend in total hours worked H as:
TFP is also smoothed with an HP filter. Finally, trend total hours, capital, and trend TFP are combined to compute potential or trend GDP as follows:
Potential growth can be broken down into three components: TFP growth, capital accumulation, and growth in worked hours:
Results: Using the production function approach to estimate potential output in Austria during 1991-2010 the following stylized facts emerge:
a. The average trend GDP growth rate has dropped from 2.3 percent in 1991-2000 to 2.0 percent over 2001-2010.
b. The global financial crisis did not have a sizable effect on the level of potential output or its growth rate in Austria.
c. The rate of capital accumulation slowed down markedly from 3 percent in the early 1990s to about 1.5 percent in recent years. There was a less pronounced decline in trend growth in TFP from 1.2 percent during 1991-2000 to 0.8 percent over 2001-2010. The trend growth in total hours worked, on the other hand, increased from 0.4 percent to 0.9 percent over the same period, owing mainly to an increase in labor force participation.
These patterns of growth seem to share some but not all features with those of other euro area countries, such as Germany, Italy, or France. While the trend growth rate declined in all the four countries, in Austria it remains the highest. In all countries, improved labor utilization helped support potential growth, though in Germany this process started only in 2006. The deceleration in capital accumulation observed in Austria is also visible in Germany and Italy, but not in France. In the latter country, as in Italy, there was a sharp slowdown in TFP growth.
One possible interpretation of the shifting patterns of growth in Austria is that increased economic integration with relatively-capital poor CESEEs resulted in a reduction in the trend increase of the capital/labor ratio in the Austrian economy. This interpretation is consistent with the observed deceleration in capital accumulation in Austria, as well as the increase in FDI toward CESEEs. In addition, slower growth in capital intensity would also slow down labor productivity growth and, hence, equilibrium real wage growth. Indeed, in Austria average real wage growth decelerated from 3.7 percent in 1991-1999 to 0.7 percent in 2000-2010.
Estevao, Marcello, and Evridiki, Tsounta, 2010, Canada’s Potential Productivity and Output Growth: A Post-Crisis Assessment, International Productivity Monitor, Number 20, Fall 2010
Gnan, Ernest, Jurgen Janger, and Johann Scharler, 2004, Determinants of Long-Term Growth in Austria—A Call for National Growth Strategy, Monetary Policy and the Economy, Q1/04
Koman, Reinhard, and Dalia Marin, 1999, Human Capital and Macroeconomic Growth: Austria and Germany 1960-1997, An Update, mimeo.
Annex 2. Recent Developments in the Banking Sector1
Austria’s financial sector is dominated by traditional retail banks. Financial stability concerns are mainly related to credit risk in the banks’ large loan portfolios in the CESEEs, where NPLs have mounted following the 2009 financial crisis.
Annex 3. Spillover Risks from the Euro Area Periphery to Austria1
Though spreads on Austrian government debt are higher than before the financial crisis, recent financial tensions in the euro area periphery have not prompted financial markets to price in an extra risk premium for Austria so far. This Annex examines the correlation between sovereign bond spreads for Austria and spreads for the three euro area countries that have received international financial assistance, Greece, Ireland, and Portugal (the EA3). This exercise is a test of whether markets expect that increased risk in those countries would spill over to Austria.
After increasing sharply for a brief period in early 2009, over the past two years the Austrian sovereign spread has been trending downward while EA3 spreads have risen substantially.
Changes in financing conditions in Austria seems to be more closely correlated with indicators of global risk appetite, such as the VIX, than with EA3 risk.
To estimate the relationship between Austrian and EA3 perceived sovereign risk more rigorously, we regress changes in sovereign bond spreads in Austria on changes in spreads for similar bonds in the EA3 (and a constant term) during a moving window over 26 weeks. In the regression, global financial market conditions including the TED spread, the VIX, and their interactions with the crisis occurrence are controlled for. The results show that Austrian spreads have become considerably less sensitive to EA3 spreads in recent months, particularly since the spring of 2010, when the international assistance package for Greece was put together. Thus over the past year, financing conditions in the EA3 affected Austria only to the extent they registered on a global scale. This suggests that, while it is unlikely to be affected if market concerns remain confined to the EA3 countries, Austria would likely suffer should these concerns lead to generalized market turmoil.
Annex 4. Options for Government Expenditure Rationalization in Austria1
International comparison suggests that the following three areas offer particular scope for efficiency gains and rationalization: early labor market exit (Section A), health care (Section B) and subsidies (Section C).