Forecasting Myopia: Unwarranted Optimism

International institutions (EU and OECD 2021 +3.4%, 2022 +4.2%) and national institutes (WIFO 2021 2.3%, 2022 +4.3% opening scenario) increase their GDP forecasts for Austria (and the Eurozone) nearly on a monthly basis. They seem to follow Covid infection rates as a leading indicator.

However, a strong case can be made that they are wrong by ignoring the deep scarring that Covid and the lockdowns have inflicted both on labor and on business. In labor market theory we know the phenomenon of „hysteresis“, describing the long-lasting effects of long-term unemployment which slow down takeup of possible job offers. The Covid crisis will also have hysteresis effects for business, because in the one and a half years of Covid so far many business defaults have been delayed by government interventions, especially by deferring loan repayments and compensating losses and costs. Other businesses will struggle severely because new competitors have arisen, quality and technical specifications for their products (e.g. car industry) will have changed, and supply chains broken or impaired (see e.g. the new lack of high-tech chips for car production; the delivery problems caused by a renewed outbreak of Covid in formerly well-performing South-East Asian countries; the bifurcation of supply chains between China and the US). To repair all these effects and to master the transition to a „new“ economy will take more time and more effort than the frequently hailed pent-up consumer demand supported by the doubling of household savings rates will support.

I argue that the major mistake forecasters are making is looking just at the demand side: they see that exports have held up, that investment will be aided by large programs in the US and the Resilience and Recovery Fund of the EU, and that consumers are starting to spend again. The large adjustment problems due to government commitments to reduce global warming and speeding up digitization of both society and economy seem to be neglected.

In Austria, where unemployment remains high, we also see no strategic government programs, neither one acting as extra stimulus nor one as a program towards the green transformation. Much money will have been spent on aid to workers and business (around 10% of GDP), much of it misguided (e.g. to gambling firms, to airlines, to political party institutions), but mainly directed towards re-establishing the existing economy. Many of the potentially game-changing projects supported by the EU-RRF submitted by Austria are „old“ projects. It remains to be seen where the impetus for the necessary transformation and modernization shall come from. True, there are individual projects (such as the 1-2-3- railway ticket) which may reduce traffic emissions and others, but one looks in vain for a Green Industrial Strategy, for „mission“ projects (e.g. in health, in land use, in long-term care, in green technologies) that will make a significant impact towards the necessary transformation. The major market-conforming project, to adequately price CO2 emissions, has not yet taken off. What we see is old hats, like a proposal to increase pressure on the unemployed to take up jobs, to reduce even further the tax burden on businesses. The population does not see a concerted effort by the coalition parties to seriously and quickly engage in the transformation of the economy. The path towards a “better future” will be arduous, it requires government guidance.

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Filed under article in english, Climate Change, Crisis Response, European Union, Fiscal Policy

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