Austrian economy to slow down after strong first half

Friedrich Fritzer, Martin Schneider, Richard Sellner, Alfred Stiglbauer, Klaus Vondra ¹

In the second half of 2022, the war in Ukraine and ensuing high inflation are set to deal a major blow to Austria’s economy. In the first half, robust economic growth was still carried by consumers’ pent-up demand and strong exports. As a result, economic growth will still come to about 5% in 2022 as a whole. Yet, in the summer, first signs of a trend reversal became evident in the Austrian labor market. Unemployment rates are already edging up, starting from lower levels than before the COVID-19 pandemic, and the number of people in employment and vacancies are edging down. HICP inflation had increased sharply since the beginning of the year, but in August lower fuel prices caused it to move sideways. For the rest of the year, inflation is, however, expected to remain high.

1 After strong first half, economic growth to weaken notably in second half

According to the quarterly national accounts data released by Statistics Austria, the Austrian economy grew by 1.5% in the second quarter of 2022 (quarter on quarter; in real terms, seasonally and working-day adjusted). Economic growth had thus been revised upward considerably against the end-July national accounts flash estimate (+0.5%) published by the Austrian Institute of Economic Research (WIFO) on July 29, 2022. In addition, growth figures were also revised upward for the third quarter of 2021 (+0.3 percentage points) and the first quarter of 2022 (+0.4 percentage points). As a result, the GDP forecast for 2022 overall was ­mechanically revised upward by 1.6 percentage points from +3.8% (OeNB’s ­economic assessment of June 2022) to +5.4%. In the same vein, quarter-on-quarter growth rates were also revised upward, some even considerably, in Germany (Q1 22), Italy (Q1 and Q2 22), Spain (Q2 22) and the Netherlands (Q1 and Q2 22). As a consequence, the euro area as a whole is set to record an annual growth rate that exceeds expectations before the summer.

Table 1: National accounts data for Austria (Q2 data published on September 1, 2022)  

	GDP	Private consumption	Government consumption	Gross fixed ­captial ­formation	Exports	Imports	Domestic demand (without inventories)	Net ­exports	Changes in inventories	Statistical discrepancy	Inventories and ­statistical discrepancy
	Change on previous period in %						Contribution to GDP growth in percentage points
Q3 21	+3.7	+9.0	+1.9	–4.4	+1.3	+0.6	3.6	0.4	–1.0	0.7	–0.3
Q4 21	–0.9	–3.6	+4.0	+1.7	+2.0	+1.9	–0.6	0.1	–0.2	–0.3	–0.4
Q1 22	+1.9	+1.6	–3.2	+0.1	+6.8	+5.2	0.1	1.0	0.6	0.1	0.7
Q2 22	+1.5	+0.8	+0.9	–1.0	+2.4	–0.3	0.3	1.7	0.1	–0.6	–0.5
2020	–6.9	–8.4	–0.4	–5.0	–11.5	–9.5	–5.6	–1.6	0.1	0.3	0.4
2021	+4.8	+3.6	+8.5	+8.7	+9.7	+13.3	5.8	–1.6	0.5	0.1	0.6
Revisions compared to flash Q2 national accounts data (published on July 29, 2022)
	Percentage points						Percentage points
Q3 21	+0.3	–1.2	+0.1	–1.7	+0.4	–0.7	–1.0	+0.6	-	-	–1.1
Q4 21	–0.1	+0.2	–0.4	+1.7	+0.1	–0.9	+0.4	+0.5	-	-	–1.4
Q1 22	+0.4	+0.8	–0.2	–1.5	+4.6	+1.6	+0.0	+1.8	-	-	–0.3
Q2 22	+1.0	+2.7	+0.9	–2.2	–0.3	–0.8	+1.0	+0.3	-	-	0.0
2021	–0.1	+0.3	+0.2	+4.5	–4.8	–3.1	+1.3	–1.0	-	-	0.0
Source: Statistics Austria, WIFO.

The revisions of the national accounts data point to a much more favorable ­economic development than the flash estimate of July 29. At +0.8%, private ­consumption now posts a positive growth rate, as opposed to the strong decline (–1.9%) in the flash estimate. Government consumption was likewise revised ­upward, while investments were revised downward to –1.0%.

From a production-side perspective, both the industry sector (+1.3%) and the services sector (+1.6%) expanded significantly. At +19%, the strongest recovery was recorded for accommodation and food service activities (NACE I; not shown separately in table 2). In the second quarter of 2022, the value added of this sector amounted to 81% of the pre-crisis level (2019). It had already stood at 89% in the third quarter of 2021, before dropping again to 63% because of the lockdown in the fourth quarter of 2021.

Table 2: National accounts data for Austria (production-side data published on September 1, 2022)  

	GDP	Gross value added	Agriculture (NACE A)	Industry (NACE B–E)	Manu­facturing (NACE C)	Construction (NACE F)	Services, ­total (NACE G–U)	Services, private (NACE G–N)
	Change on previous period in %
Q3 21	+3.7	+3.6	–1.0	+0.8	+0.7	–2.0	+5.1	+6.2
Q4 21	–0.9	–1.1	–2.4	+1.4	+0.5	–1.0	–1.8	–2.5
Q1 22	+1.9	+2.3	+2.1	+1.8	+2.1	+2.8	+2.3	+3.4
Q2 22	+1.5	+1.4	–2.0	+1.3	+1.3	–0.7	+1.6	+1.6
2020	–6.9	–6.9	–2.8	–6.5	–7.0	–2.9	–7.5	–8.1
2021	+4.8	+4.2	+7.9	+7.7	+9.1	+3.2	+3.2	+2.7
Revisions compared to national accounts data (Q2 flash data published on July 29, 2022)
	Percentage points
Q1 21	–0.3	–	–	–1.1	–0.2	–1.1	–0.6	–1.4
Q2 21	+0.0	–	–	+0.2	+0.9	–0.2	+0.2	+0.1
Q3 21	+0.3	–	–	–1.0	–0.8	–1.0	+0.6	+0.7
Q4 21	–0.1	–	–	+0.8	+0.1	–0.7	–0.5	–0.9
Q1 22	+0.4	–	–	+0.6	+0.7	+1.2	+0.2	+0.7
Q2 22	+1.0	–	–	+0.6	+1.1	–0.8	+1.3	+1.3
2020	–0.0	–	–	–0.0	+0.0	+0.0	–0.0	–0.0
2021	–0.1	–	–	–1.4	+0.5	–1.7	–0.3	–1.4
Source: Statistics Austria, WIFO.

Table 2 continued: National accounts data for Austria (production-side data published on September 1, 2022)  

	Trade, transport/ storage, hospitality (NACE G–I)	Information and communication (NACE J)	Financial and ­insurance services (NACE K)	Real estate activities (NACE L)	Scientific and ­technical activities (NACE M–N)	Public ­services (NACE O–U)	Public ­adminis- tration (NACE O–Q)	Other ­services (NACE R–U)
	Change on previous period in %
Q3 21	+15.0	+1.2	+0.2	+0.5	–0.1	+2.5	+1.7	+8.9
Q4 21	–6.2	+1.2	+1.6	+0.5	–0.8	–0.1	+0.9	–7.2
Q1 22	+5.6	+0.8	–1.6	+1.0	+4.8	–0.4	–1.0	+4.6
Q2 22	+3.8	+0.1	–1.5	+0.4	+0.3	+1.6	+1.6	+1.6
2020	–15.5	–1.7	+4.7	+0.3	–8.0	–5.8	–3.6	–19.5
2021	+1.2	+3.5	+2.4	+1.1	+7.0	+4.5	+4.8	+2.3
Revisions compared to national accounts data (Q2 flash data published on July 29, 2022)
	Percentage points
Q1 21	–2.8	+0.0	–0.6	–0.1	–1.1	+1.4	+1.5	+0.7
Q2 21	+0.1	+0.4	+0.3	–0.4	+0.7	+0.5	+0.6	+0.0
Q3 21	+2.1	–0.1	–1.3	–0.8	+1.2	+0.5	+0.6	+0.3
Q4 21	–0.6	–0.2	–1.4	–0.2	–2.1	+0.4	+0.3	+0.4
Q1 22	+2.2	–0.9	–1.7	–0.1	+0.4	–1.1	–1.1	–1.3
Q2 22	+3.7	+0.3	–2.3	+0.1	–0.8	+1.2	+1.6	–1.2
2020	–0.0	–0.0	–0.1	–0.0	–0.0	+0.0	+0.0	+0.0
2021	–2.5	–0.0	–1.8	–0.8	–0.2	+2.3	+2.5	+1.2
Source: Statistics Austria, WIFO.

In the second half of 2022, this brisk growth will level off markedly, however. Among others, the EU economic sentiment indicator (ESI) produced by the European Commission, the WIFO business climate index and the purchasing managers’ index recorded significant declines in July and August, indicating an economic slowdown in Austria in the coming months. While the situation in summer was still predominantly deemed stable in most areas, firms’ expectations for the future are deteriorating. Especially order volumes, also from abroad, started downtrending. Consumer confidence even hit a historic low in July 2022, and retail trade confidence likewise dropped considerably, namely from –9.7 in July to –23.6 in August. In the construction sector, confidence, while at a high level, had already been shaken in the second quarter. The expected rise in interest rates and stricter housing loan criteria may continue to drive the slowdown in construction activity. In the services sector, confidence dropped below its long-term average in August, ­suggesting that catching-up effects due to the reopening of restaurants and tourism services are petering out.

On the demand side, persistently high inflation keeps slowing income growth and, by extension, consumption. Given a worldwide tightening of monetary policy that goes hand in hand with rapidly rising interest rates, refinancing costs are going up. This in turn puts a damper on the willingness to invest, which has already been diminishing due to the currently high uncertainty. Production expectations are being revised downward considerably, especially in Germany and some countries in Central, Eastern and Southeastern Europe (CESEE), as the war in Ukraine is expected to continue and uncertainty about Russia’s gas supplies to Europe ­remains high. The chance of a recession is rising not only in the USA but also in Germany, and thus in the entire euro area. The slowing economy is mirrored in the decline of global supply chain pressures as measured by the Federal Reserve Bank New York. Although many firms still report labor/material shortages or capacity ­constraints, we expect economic tensions to ease in the second half of 2022.

2 Labor market remains tight due to labor shortages; wage pressure rises

Collective wage agreements in the last months show an upward trend. Still, the index of agreed minimum wages is rising only slowly, given the lesser weight in the index of recent agreements. To better capture the current uptrend in collective wage agreements, the OeNB developed an alternative indicator, the so-called wage tracker. Currently, it is based on 336 collective wage agreements that have been concluded since September 2020. The index is calculated as a monthly average of collectively agreed wage increases weighted by employment. Chart 4 shows that, in recent months, the wage tracker (red line) was closely in sync with the increasing index of agreed minimum wages (blue line). For the near future, the wage tracker shows wage increases of over 6% owing to certain favorable agreements recently concluded, which extend to mid-2023 (e.g. meat industry: +5.7%, clothing industry: +5.4%, mill industry: +5.5%, animal feed industry: +6.0%, bakery trade: +6.5%). Collective wage agreements in Austria are, as a rule, concluded for a ­period of 12 months. Rising wages depicted by the wage tracker are roughly in line with the inflation measure usually used in collective bargaining (average inflation over past 12 months; yellow columns in chart 4). Though only a small number of employed persons has experienced high wage increases (see dashed green line reflecting the coverage of collective wages in chart 4), we expect wage increases to remain high overall in fall 2022, provided no major macroeconomic changes will occur.

3 Inflation continues to rise unabated in the third quarter of 2022 ²

Since April 2022, the rise in inflation has mainly been driven by energy prices given surging crude oil and wholesale gas prices. Energy consumer prices account for close to 40% of the inflation spurt that occurred between April and July 2022, but the prices of all other HICP components have gone up as well. Services and food (including alcohol and tobacco) explain about one-quarter each of the increase observed from April to July, and nonenergy industrial goods slightly more than 10%. Core inflation, which excludes energy and food prices, totaled 5.1% in July 2022, having mounted by 1.2 percentage points from April 2022. The rise in core inflation is mainly attributable to ongoing price increases for durable consumer goods such as vehicles and furniture, but prices have been going up in the tourism industry as well.

Following a rate of 3.4% in April 2022, the pace of inflation in the services industry peaked at 4.8% in July 2022, the highest level since the euro area was created in 1999. Within the services sector, prices have soared above all for hospitality services. The increases in restaurant and café prices likewise reached a ­record high (9.3%) in July 2022, while the inflation rate for accommodation services (9.8%) fell just slightly short of the historical high (11.9%) recorded in May 2022. Last but not least, the prices for flight tickets and package tours have also seen ­exceptional price spikes of late. With demand remaining strong, many service ­providers appear to have been able to pass through higher costs resulting from ­rising energy and food prices to consumers.

Nonenergy industrial goods prices have also been going up considerably. With an inflation rate of 5.8% in July 2022, they well exceeded the long-term average (1% since 2001). These developments have been primarily driven by the prices for durable consumer goods, such as furniture and furnishings as well as vehicles. As a case in point, in July 2022, used car prices exceeded the prices charged a year earlier by 25%. Demand for used cars is likely to have been pushed up by the global chip shortage and ensuing supply-chain bottlenecks in car manufacturing. Producers continued to face high input costs as commodity prices in both the energy and ­nonenergy segments were spiraling and supplies tightened further in the wake of Russia’s war on Ukraine. While it had not been speeding up further in recent months, producer price inflation remained at elevated levels in June 2022 (27.7%) and just slightly below the peak observed in April 2022 (28.6%).

Energy price inflation, in contrast, accelerated to 46.9% in July (April 2022: 37.6%). Crude oil prices as well as gas and electricity wholesale prices spiked ­further recently, not least in anticipation of gas supply shortages. As a result, motor fuel prices have been surging: in July 2022, prices were 63% above the price level of July 2021. Heating oil prices even climbed 108% beyond the July 2021 level. Initially, the rise in energy prices was cushioned somewhat in May 2022, when taxes on electricity and natural gas were lowered considerably. However, gas and electricity prices are set to surge again in September 2022, given sharp price ­increases by the utility providers serving Lower Austria and Vienna.

Finally, food prices (including alcohol and tobacco) were up 10.2% in July 2022 compared with July 2021 (April 2022: 7.1%). Since April 2022, we have seen a sizable increase in prices in particular for meat, milk, eggs, cheese and oils and fats. To some extent, these developments reflect the rise in prices for agricultural commodities. After all, Russia’s war on Ukraine has not only been driving up ­energy prices but has also been a major push factor in the global rise of food prices. In June 2022, agricultural commodity prices exceeded the year-earlier level by about 35%. At the same time, the high energy prices have been driving up the cost of agricultural production through higher transportation and input costs, given a year-on-year increase in fuel and fertilizer prices of 63% and 68% in July 2022.

Nontechnical summaries

in English and German

Nontechnical summaries in English

What is the impact of carbon pricing on inflation in Austria?

Andreas Breitenfellner, Friedrich Fritzer, Doris Prammer, Fabio Rumler, Mirjam Salish

Coping with the climate crisis is among the key policy challenges of our times. After all, global warming and climate action are both having an impact on prices and inflation, directly and/or indirectly through demand-side or supply-side effects. The resulting inflation impact is difficult to quantify, however. This is why our focus is on assessing the direct inflationary impact of policy measures that have been adopted to limit and discourage greenhouse gas emissions by ­setting a price for carbon. For Austria, we identified but a limited impact on inflation from both the scheme for carbon emissions trading introduced by the EU in 2005 and the national carbon pricing/taxation scheme to be rolled out in Austria in 2022.

EU-wide emissions trading, while not being overly effective right from the start, served to lower carbon emissions by some 30% across the EU and by roughly 20% in Austria until 2020. ⁴ Unlike other EU countries, Austria has not ­observed significant inflationary effects from the gradual rise of emission allowance prices. This can, above all, be ­attributed to the fact that more than 80% of Austria’s electric power supply stem from renewable energy sources. Next, we assess Austria’s new national carbon pricing scheme and its impact on consumer price inflation. The “carbon ­pricing” label notwithstanding, the new scheme is ultimately a tax levied on all sectors not covered by EU emissions trading. Much like Germany, Austria is going to gradually raise this carbon tax from EUR 30 per ton of carbon dioxide in 2022 to EUR 55 in 2025, pending migration to a full-fledged emissions trading system. In terms of direct implications of this regime, we estimate headline inflation to grow by just 0.1 or 0.2 percentage points per year. On top of this, indirect effects may drive up consumer prices further, depending on the rate at which production costs are passed through to consumer prices, and depending on the extent to which rising wage settlements may trigger second-round effects. In turn, the impact on inflation may decrease over time as carbon emissions go down.

At the same time, increased efforts to protect the climate are going to raise the risks to price stability, thus making monetary policymaking more challenging. Fulfilling its obligations from the Paris agreement, the EU pursues the ­ambitious target of cutting net greenhouse gas emissions to zero by 2050. Austria even aims for 2040. In this respect, carbon pricing is a cost-effective and technology-neutral means of climate action to counteract the market failure that private sector prices for goods and services do not cover the social costs of carbon emissions. Ideally, carbon pricing would only change relative prices, such as the price of fossil fuels versus the price of renewable energy sources, thus nudging businesses and consumers to changing their energy consumption behavior as needed. In practice, however, climate policies will also have an impact on the overall price level, given nominal rigidities in goods and factor markets, the low price elasticity of energy demand and the potential unanchoring of price expectations. Although economies of scale of green technologies can also have a disinflationary effect, one should expect net effects to be inflationary for some time.

While inflation rates have recently been driven to record highs by largely non-climate-related causes, including ­pandemic and war conditions, calls have been emerging to suspend carbon pricing. Yet, suspension would be counterproductive because this would remove the incentive to consume less energy and could eventually thwart the price effect if applied widely. Instead, the measure of choice would be direct transfers as a means to protect lower-income households from the impact of energy price inflation.

Climate change and climate action are going to drive up inflation and make it more volatile, thus creating a challenge for monetary policy. Here, a predictable transition path with corresponding (shadow) prices for carbon dioxide will give economic agents the planning security needed and central banks better conditions to fulfill their mandate. Monetary policymakers can support climate action indirectly by stabilizing long-term expectations at low levels and preventing second-round effects, without counteracting the relative price changes. However, if carbon pricing were to drive up inflation over the medium term, raising interest rates would be appropriate to safeguard price stability.

Where have all the insolvencies gone?

Helmut Elsinger, Pirmin Fessler, Stefan Kerbl, Anita Schneider, Martin Schürz, Stefan Wiesinger, Michael Wuggenig

The COVID-19 pandemic and related measures have had a major impact on the Austrian economy. Against this backdrop the authors of this paper address three issues regarding firm-level developments and the effects of government support measures during the pandemic period.

1. How have insolvency numbers changed from the pre-pandemic period to the pandemic period, and do we see catch-up effects once government support broadly ceased?

2. Have the lower insolvency rates during the pandemic period been offset by higher rates of firms exiting the market without insolvency and/or changing numbers of firm entries?

3. What impact did pandemic-related support have on corporate balance sheets?

Analysis of the data yielded the following results: 1. Insolvency rates remained well below pre-pandemic levels in 2020, 2021 and in the first half of 2022. 2. The number of firm exits without insolvency went down as well, while the number of firm entries remained stable in 2020 and even rose markedly in 2021. 3. On the assumption that the pandemic support payments were designed to keep vulnerable firms in business, our corporate balance sheet data suggest that the support was lavish and probably not targeted enough.

To further substantiate our findings based on corporate balance sheet data, we cross-check our database with the European Commission’s state aid transparency database, which covers grants and guarantees exceeding EUR 100,000. The evidence at hand suggests that a rather large share of the public support payments ultimately appears to have increased firms’ deposits, respectively their liquidity buffers, in a highly uncertain environment. Furthermore, firms receiving the transfer payments were also found to have increased their equity levels. In other words, the support appears to have gone well beyond the levels required to keep firms in existence.

Nontechnical summaries in German

Wie wirkt sich die CO2-Bepreisung auf die Inflation in Österreich aus?

Andreas Breitenfellner, Friedrich Fritzer, Doris Prammer, Fabio Rumler, Mirjam Salish

Die Bewältigung der Klimakrise ist eine der größten Herausforderungen unserer Zeit. Sowohl die Erderwärmung als auch der Klimaschutz zeigen Auswirkungen auf Preise und Inflation, entweder direkt oder indirekt über Effekte auf Angebot und Nachfrage. Diese kombinierten Inflationseffekte sind allerdings schwer zu quantifizieren. Deshalb ­konzentriert sich diese Studie auf die direkten Auswirkungen der Bepreisung von Treibhausgasemissionen auf die ­Verbraucherpreisinflation. Gemäß unseren Berechnungen erhöhen sowohl der europäische Emissionshandel als auch die geplante CO2-Bepreisung in Österreich die österreichische Inflation maximal um wenige Zehntel-Prozentpunkte.

Das 2005 in der EU eingeführte Emissionshandelssystem zeigte nach Anlaufschwierigkeiten die gewünschte klima­politische Wirkung. ⁵ Bis 2020 wurden etwa 30% der EU-weiten und grob 20% der österreichischen Emissionen ­gesenkt. Auf die Inflation hatten die steigenden Preise von Emissionszertifikaten in Österreich anders als in anderen EU-Ländern keinen nennenswerten Einfluss. Dies ist vor allem darauf zurückzuführen, dass hier mehr als 80% der Stromerzeugung aus erneuerbaren Energiequellen stammt. Weiters analysieren wir die Auswirkungen der in Österreich bevorstehenden CO2-Bepreisung auf die Verbraucherpreisinflation. Wenn auch anders genannt, handelt es sich effektiv um eine Steuer, die auf nicht vom EU-Emissionshandel erfasste Sektoren erhoben wird. Ähnlich wie in Deutschland soll diese schrittweise, zwischen 2022 und 2025 von 30 auf 55 Eur erhöht werden, bevor sie in ein Emissionshandelssystem überführt wird. Was die direkten Auswirkungen betrifft, so schätzen wir, dass die Gesamtinflation zwischen 2022 und 2025 jährlich um lediglich 0,1 bis 0,2 Prozentpunkte steigen wird. Hinzu kommen indirekte Effekte je nach Ausmaß und Tempo der Umwälzung der Produktionskosten auf die Verbraucherpreise sowie eventuelle Zweitrundeneffekte durch höhere Lohnabschlüsse. Andererseits könnte der Inflationseffekt mit fortschreitender Dekarbonisierung allmählich nachlassen.

Zunehmende Klimaschutzanstrengungen werden jedoch das Risiko für die Preisstabilität verstärken und damit die Geldpolitik herausfordern. Das Pariser Abkommen vollziehend hat sich die EU das ehrgeizige Ziel gesetzt, bis 2050 die Netto-Treibhausgasemissionen auf null zu reduzieren; Österreich will sogar schon 2040 klimaneutral werden. Die ­Bepreisung von Kohlenstoff ist eine kosteneffiziente und technologieneutrale Klimaschutzmaßnahme, die einem ­Marktversagen entgegenwirkt; denn die gesellschaftlichen Kosten von Treibhausgasemissionen sind in den privatwirtschaftlichen Preisen für Güter und Dienstleistungen nicht abgebildet. Im Idealfall ändert die Bepreisung nur die relativen Preise, beispielsweise zwischen fossilen und erneuerbaren Energieträgern, was Anreize für die notwendige Verhaltensänderungen von Unternehmen und Haushalten schafft. In der Realität ändert die Klimapolitik jedoch auch das ­allgemeine Preisniveau. Begünstigt wird dies durch nominelle Rigiditäten auf Güter- und Faktormärkten, die geringe Preiselastizität der Energienachfrage und eine mögliche Entankerung der Inflationserwartungen. Zwar wirken durch Skaleneffekte immer kostengünstiger werdende erneuerbare Energieträger desinflationär, jedoch ist damit zu rechnen, dass auf absehbare Zeit die inflationären Effekte überwiegen.

Obwohl die derzeitigen Rekordinflationsraten kaum klimapolitische Ursachen haben (Stichwort: Pandemie, Krieg), werden Forderungen laut, die CO2-Bepreisung auszusetzen. Diese Vorgangsweise ist jedoch kontraproduktiv, da sie den Anreiz nimmt, weniger fossile Energie zu verbrauchen, was den gewünschten Preiseffekt bei einer flächendeckenden Anwendung letztendlich sogar konterkarieren könnte. Besser geeignet sind direkte Transfers um einkommensschwache Haushalte vor den Auswirkungen der Energiepreisinflation zu schützen.

In Zukunft werden Klimawandel und Klimawende erhöhte und volatile Inflation mit sich bringen und daher die ­Geldpolitik herausfordern. Ein vorhersehbarer Transformationspfad mit entsprechenden (Schatten-)Preisen für CO2 gibt den Wirtschaftsakteuren die nötige Planungssicherheit und hilft den Zentralbanken ihr Mandat zu erfüllen. Die Geldpolitik kann die Klimapolitik indirekt unterstützen, indem sie die langfristigen Inflationserwartungen auf niedrigem Niveau stabilisiert und Zweitrundeneffekte verhindert, ohne jedoch relativen Preisänderungen entgegenzuwirken. Wenn aber die CO2-Bepreisung die Inflation mittelfristig in die Höhe treibt, ist eine geldpolitische Straffung im Sinne des Preisstabilitätsziels gerechtfertigt.

Wie entwickeln sich die Insolvenzen in Österreich in Zeiten von COVID-19?

Helmut Elsinger, Pirmin Fessler, Stefan Kerbl, Anita Schneider, Martin Schürz, Stefan Wiesinger, Michael Wuggenig

Die COVID-19 Pandemie und die damit verbundenen Maßnahmen hatten starke Auswirkungen auf die österreichische Wirtschaft. In diesem Zusammenhang geht das Autorenteam dieser Studie drei zentralen Fragen in Bezug auf die ­Entwicklung von privaten Unternehmen und die Auswirkungen von Unterstützungsmaßnahmen des Staates während der Pandemie in Österreich nach:

1. Wie haben sich Insolvenzen während der Pandemie entwickelt und gibt es einen Aufholeffekt in Bezug auf das ­Insolvenzgeschehen nach dem Auslaufen von staatlichen Maßnahmen?

2. Wurden die beobachteten niedrigeren Insolvenzraten während der Pandemie durch höhere Marktaustritts- bzw. niedrigere Markteintrittszahlen kompensiert?

3. Wie haben sich die Unterstützungsmaßnahmen des Staates auf die Bilanzen der Unternehmen ausgewirkt?

Folgende Antworten ergeben sich aus der Analyse der Daten: 1. Die Insolvenzen blieben in den Jahren 2020, 2021 und auch im ersten Halbjahr 2022 deutlich unter dem Vorkrisenniveau. 2. Auch die Zahl der Firmenaustritte ohne ­Insolvenz ging zurück, während die Firmeneintritte im Jahr 2020 stabil blieben und im Jahr 2021 sogar deutlich gestiegen sind. 3. Unter der Annahme, dass die staatlichen Unterstützungszahlungen dazu dienten, konkursgefährdete Unternehmen zu retten, deuten unsere Unternehmensbilanzdaten darauf hin, dass die Unterstützung zu hoch und wohl nicht zielgerichtet genug war.

Um diese Erkenntnisse aus den Firmenbilanzen zu untermauern, verknüpfen wir unsere Daten mit der Transparenzdatenbank der Europäischen Kommission und beziehen die staatlichen Beihilfen über EUR 100.000 in unsere Analyse mit ein. Die vorliegenden Ergebnisse deuten darauf hin, dass ein großer Teil der öffentlichen Unterstützungszahlungen zu erhöhten Unternehmenseinlagen bzw. Liquiditätspuffern geführt hat. Außerdem wurden die Gewinne und damit das Eigenkapital in einem unsicheren Umfeld gestärkt. Die Subventionen stärkten nicht nur die Liquidität und Solvenz der geförderten Unternehmen, sondern gingen darüber hinaus.

Analyses

What is the impact of carbon pricing on inflation in Austria?

Andreas Breitenfellner, Friedrich Fritzer, Doris Prammer, Fabio Rumler, Mirjam Salish ⁶
Refereed by: Friderike Kuik, European Central Bank

Tackling the climate crisis is one of the biggest challenges of our times with major repercussions for the macroeconomy. This study focuses on the impact of setting a price for carbon on consumer price inflation. Carbon pricing is a cost-effective means to reduce greenhouse gas emissions and incentivize sustainable behavior by increasing the prices of fossil fuels. To assess the related inflationary risk, we elaborate on two complementary (explicit) pricing approaches – carbon taxation and emissions trading – in the EU and in Austria. After teething problems, the emissions trading system launched by the EU in 2005 turned into an effective tool of ­decarbonization, with roughly 30% of EU-wide emissions cut by 2020 as emission allowance prices were raised over time. In Austria, rising allowance prices did not have a significant ­impact on inflation given the high share of renewable sources in power generation. With regard to the carbon tax that Austria will apply in the course of 2022 to sectors not covered by emissions trading, we estimate HICP inflation to go up by 0.1 to 0.2 percentage points annually until 2025, excluding indirect and second-round effects. Looking forward, trends in climate change and low-carbon transition may further impact inflation, its volatility and its distributional consequence and pose a challenge for monetary and other policies alike. This, however, should not detract from necessary climate protection in view of the consequences of unmitigated climate change on inflation and human activity at large.

JEL classification: E31, H23, Q54

Keywords: climate change, carbon pricing, inflation, monetary policy

Indeed, mechanical analysis of the inflationary effects of carbon pricing, abstracting from behavior adjustment to changes in relative prices, suggests strong upward inflationary pressure in the short run (see e.g. Nöh et al., 2020). For the medium run, however, empirical studies show very small or even negative effects of carbon pricing on the overall price level (see e.g. Moessner, 2022, and Konradt and Weder di Mauro, 2021).

Unlike some other countries, we have not observed significant inflationary ­effects from the rise in carbon allowance prices in the EU emissions trading system (ETS) in Austria (see below; Pacce et al., 2021). This can be ascribed to the fact that renewable sources account for more than 80% of Austria’s electricity mix. Against this backdrop, we analyze the effect planned carbon taxation is likely to have on consumer price inflation in Austria. ⁷ Regarding the direct impact alone, we project this policy to increase headline inflation between 0.1 and 0.2 percentage points annually from 2022 to 2025, reflecting staged implementation. This may be accompanied by indirect and second-round effects, depending on the pass-through of production costs to consumer prices and successively higher wage claims. Other­wise, the inflationary effect could gradually decrease with progressing decarbonization.

Given political uncertainty, it remains unclear whether prices will continue to be driven up in the medium to long run by ambitious climate policies and/or ­increasing climate damage. Yet, a predictable low carbon transition path with corresponding (shadow) prices will give economic agents the planning security needed and central banks better conditions to fulfill their mandate. The latter implies that the ECB’s monetary policy should react to climate-related energy price increases only if they pose a risk to price stability in the medium term. Ensuring affordable energy costs for vulnerable households is, after all, a matter of fiscal policy.

The remainder of this paper is structured as follows: Section 1 discusses the theoretical literature on the impact of climate change and climate action on inflation. In sections 2 and 3, we elaborate on (fiscal) policies setting a price on carbon emissions, specifically carbon emissions trading and carbon taxation, with a special focus on Austria. Section 4 presents model calculations of the impact of carbon pricing on consumer bills and the affectedness of households in Austria. Section 5 concludes.

1 How do climate change and climate policy affect inflation?

In this section, we adopt the first perspective, discussing the effects of a rise in the global temperature on the inflation process in the long run (on a qualitative level) before turning to the more specific mitigation effects. Figure 1 gives an overview of the channels through which climate change and climate mitigation policies can affect prices and inflation.

1.1 Effects of climate change on inflation

The most direct and immediate impact of rising mean temperatures is expected for food and agricultural commodity prices (G in figure 1). Faccia et al. (2021) find that during hot summers in the Northern hemisphere global food prices increase by an average of about 0.4 percentage points, which is more than the standard deviation of the quarterly food price series. In the first instance, this constitutes a change in relative prices but depending on the extent of the event and given the low price elasticity of food consumption, headline inflation can be affected as well. More generally, empirical evidence (summarized in Parker, 2018) suggests that impacts of natural disasters triggered by global warming on prices are heterogeneous, depending on the type and extent of the extreme event and the subindex considered. For instance, prices for insurances against natural disasters could increase.

The expected income losses for consumers and firms resulting from lower economic activity due to more intense and frequent natural disasters and extreme weather events will have dampening effects on demand and exert downward pressures on prices (negative demand shock; A in figure 1) – see Andersson et al. (2020). However, the global demand and supply effects of climate change on inflation are difficult to assess as rising temperatures affect different countries and world regions differently and as adaptation strategies might dampen or even overturn the effects locally. Specifically, production in countries most exposed to global warming in the Global South might shift to less affected countries in the North, and costly ­adaptation strategies to the rising temperature level such as infrastructure investments, government support for technological transition or income compensation schemes may also benefit richer countries in the North (see IMF, 2017; IPCC, 2021). Thus, climate change will also have global distributional effects as emerging countries will feel the physical and economic consequences – among them also the price effects – of climate change much more than advanced economies (see IPCC, 2021 and 2022; Faccia et al. 2021; Stern, 2006, chapters 4 and 5).

Concerning the long-run consequences of global warming on real activity, Kikstra et al. (2021) estimate that by the end of the century, global GDP could be up to 51% lower than without warming depending on the persistence of damages. Previous studies such as OECD (2015), based on less sophisticated integrated ­assessment models, came to more moderate results (up to 10% lower GDP by 2100). IPCC (2022) ascribes the large span of global estimates to nonlinearities and different methodologies. The wide range of possible outcomes reflects uncertainties regarding the size, type and timing of the impacts of climate change and potential nonlinearities stemming from difficulties in assessing sectoral and regional adjustments to climate change. ⁹ A significant share of these macroeconomic impacts results from the adverse effects of climate change on labor and crop productivity and the capital stock due to heat stress and physical damage. This loss in output and capital stocks will weigh on the net wealth of households and firms, in turn affecting their investment and consumption decisions. While the supply effects described above will exert upward pressures on prices, the demand effects are expected to affect prices and inflation negatively, the difference being that the former occurs in a more erratic and temporary form while the latter materializes rather as a long-run trend.

1.2 Effects of mitigation policies on inflation

A cost-efficient and technologically neutral way of incentivizing decarbonization of the economy is putting a price on carbon to counteract the market failure that prices do not cover the social costs of carbon emissions. Carbon pricing may be implemented through taxes or an emissions trading system. ¹⁰ Carbon taxes may be levied directly on the carbon content of fossil fuels, or indirectly via environmental taxes (for a further discussion see section 3). This will affect energy and transport prices directly and, indirectly, the prices of other energy-intensive products, such as steel or cement. An EU-wide emissions trading system (EU ETS) was launched in 2005 as a key element of incentivizing decarbonization in Europe (EU and EEA-EFTA states). While up to 2021, low and variable carbon prices under this regime have not impacted inflation substantially, the drastic price hike in 2021 had considerable inflationary effects in some EU member states (see section 2).

Besides carbon pricing, governments can support the reduction of emissions and the transition to a carbon-neutral economy via command-and-control regulation (e.g. by setting emissions standards ¹¹ ), subsidies to increase energy efficiency (e.g. for installing new heating systems and insulating houses) and direct investment in green infrastructure (such as energy and transport systems). Theoretically, these industrial policy measures can be translated into shadow prices of carbon emissions. Yet, these prices and their inflationary impact are ambiguous and therefore difficult to quantify.

Looking ahead, headline inflation has been estimated to increase due to the implementation of ambitious mitigation policies in Europe (including emissions trading, carbon taxation and other measures) by 1 percentage point up to 2030, decreasing over time (NGFS, 2021). However, this inflationary impact of implicit and explicit carbon (shadow) pricing may turn negative close to 2050 when carbon neutrality will be reached due to falling prices of renewable energy and increased energy efficiency, which would in turn reduce the weight of energy in the consumption basket of households (see Andersson et al., 2020).

As discussed above, there are several policies to fight CO2 emissions having direct and indirect price effects, respectively. In the next chapters we want to discuss two schemes that have a direct impact on prices, namely the ETS system and explicit and implicit CO2 prices and taxes.

2 EU-wide climate mitigation with a direct price effect: emissions trading

2.1 How does emissions trading work?

For the fourth trading period starting in 2021, the cap for 2021 (excluding aviation) was fixed at 1.57 billion allowances, with an initial annual reduction factor of 2.2%. To reach the more ambitious emissions reduction target of the European Green Deal (–61% by 2030 compared to 2005), the European Commission proposed a one-off reduction of the emissions cap by 117 million allowances as well as an increased annual reduction factor of 4.2%. ¹⁹

2.2 Emissions trading in Austria

2.3 Evolution of emission allowance prices

2.4 Impact of emissions trading on inflation in Austria

Wholesale electricity prices are mainly driven by changes in gas prices, given that a larger demand for electricity results in increased (marginal) gas demand for gas-fired power plants. ²³ The sharp increase in EU ETS allowance prices played a secondary role in the rise of wholesale electricity prices. European wholesale electricity prices roughly tripled from January to December 2021 (see chart 3). In Austria, electricity consumer prices have typically gone up at the beginning of the year. Most recently, in 2021, we had mid-year rises too, yet still falling short of the sharp surge in wholesale electricity prices or EU ETS allowance prices witnessed in other EU countries (as e.g. Spain or the Netherlands). Apart from a lower share of contracts with flexible tariffs, the share of low-carbon electricity generation is comparatively high in Austria with more than 80% of renewable electricity and hydropower in 2020. In the euro area, however, roughly 38% of electricity came from renewable sources, 36% from fossil fuels and 26% from nuclear power plants in 2020, with large differences across countries. ²⁴ In countries with a high share of renewable or nuclear energy, the impact of changes in wholesale prices or EU ETS allowance prices on consumer prices is more limited. Pacce et al. (2021) estimate that the rise in EU ETS allowance prices was responsible for approximately 20% of the increase in wholesale electricity prices in Spain in the first half of 2021. This increase, in turn, contributed around one-third to the rise in Spain’s HICP inflation during the same time period. However, in Spain almost half of the EU ETS emissions stem from fossil fuel electricity generation, which is considerably more than in Austria. While the direct inflationary impact of higher EU ETS allowance prices on energy inflation in Austria so far seems limited, potential ­(future) effects on other components cannot be ruled out. ²⁵ Higher energy prices not only affect energy inflation but, indirectly, also other HICP components and producer prices, and might hence be passed on to consumer prices of other HICP components with some delay.

3 National climate mitigation with a direct price effect: carbon taxation

3.1 Implicit taxes on carbon emissions

Energy taxes (covered by the ETD) are the largest part of environmental taxes, which additionally cover transport taxes (directly linked to use/ownership of motor vehicles such as registration taxes) as well as the taxation of pollution and resources (see chart 4). Despite the widespread interest in environmental taxes, they only amounted to 5.4% of EU tax revenues (2.2% of GDP) in 2020, of which energy taxes accounted for around three quarters. While Austria’s energy tax revenues are below EU average at 1.2 % of GDP (EU average: 1.7% of GDP), its transport tax revenues are among the highest in the EU (see chart 4). This is due to the fact that Austria levies a vehicle registration tax that is CO2-dependent and an annual vehicle insurance tax, which are both recorded as transport taxes.

A more granular view of energy taxes in the EU shows that comparatively high tax revenues are not necessarily the result of high tax rates but might indicate high energy intensity (energy consumption/GDP). ²⁸ In particular, countries that joined the EU more recently have a high energy intensity while showing low implicit tax rates on energy, which measure the tax revenue raised per unit of energy consumed (see e.g. Avgousti et al., 2022). ²⁹ Indeed, Bulgaria, Hungary, Poland and Romania apply tax rates for motor fuels that are not significantly above the minimum tax rates. In contrast, the Netherlands and Italy levy tax rates twice as high as the minimum tax rates for unleaded petrol (EUR 359 per 1,000 liters), and Italy, Belgium and France levy diesel tax rates for cars which are almost twice as high as their minimum of EUR 330 per 1,000 liters. ³⁰ Austria’s tax rates for motor fuels are in the middle range (maximum diesel rate of EUR 425 per 1,000 liters, minimum tax rate for petrol of EUR 482 per 1,000 liters) and in the lower third for heating fuels – also reflected by the sixth-lowest implicit tax rate on energy – ­despite having one of the highest purchasing powers in the EU. At the same time, Austria’s energy intensity is already among the lowest in the EU.

3.2 Explicit taxes on carbon emissions

EU member states have started to levy national prices on carbon on sectors and products not covered by EU emissions trading but largely already covered by the ETD, primarily on mineral oils and gas. Currently, Sweden, Finland, France, Germany, Ireland, Denmark, Portugal, Latvia, Estonia, Poland and Spain levy some kind of carbon tax. The rates range from 7 cent in Poland to about EUR 116 per ton of CO2 in Sweden (see table 1). Like price levels, the types of greenhouse gas emissions covered differ widely: while some member states, such as Luxembourg, aim for broad coverage to complement EU ETS, others like Spain limit carbon taxes to very specific products such as fluorinated gases.

Table 1: Overview of carbon tax regimes  

Carbon tax rate (per ton of CO2 equivalent, April 2021)		Share of jurisdiction’s greenhouse gas ­emissions covered	Year of implementation
	EUR	%
Denmark	23.78	35	1992
Estonia	2.00	6	2000
Finland	62.00	36	1990
France	45.00	35	2014
Germany	25.00	40	2021
Ireland	33.50	49	2010
Latvia	12.00	3	2004
Luxembourg	20.00	65	2021
Netherlands	30.00	12	2021
Poland	0.07	4	1990
Portugal	24.00	29	2015
Slovenia	17.30	50	1996
Spain	15.00	3	2014
Sweden	116.33	40	1991
United Kingdom	21.23	23	2013
Source: World Bank (data updated in April 2021), OeNB.

3.3 Carbon pricing in Austria

To compensate for the volatility of energy prices, carbon pricing in Austria is aligned with energy price fluctuations under a price stability mechanism: An increase in energy prices of more than 12.5% in the first three quarters of the current year halves the carbon price increase in the next year (i.e., the price increase would be EUR 2.5 instead of EUR 5). Vice versa, a fall in energy prices by more than 12.5% would lead to a carbon price ­increase of EUR 7.5 per ton in the following year.

Table 2: Price per ton of CO2 equivalent  

Year	Austria	Germany
	EUR	EUR
2021		25
2022	30	30
2023	35	35
2024	45	45
2025	55	55
2026	Trading system	Trading system: 55–65
Source: Germany: Federal Ministry for the Environment, Austria: Eco-­social tax ­reform act 2022, part 1.

The carbon tax is aligned with emission content. In other words, as different energy sources release different amounts of CO2 during combustion, the resulting carbon price per volume or energy unit differs for each energy source (as displayed in chart 5 for diesel, petrol, heating oil and natural gas). ³⁵

As described above and indicated in chart 5, energy sources are already subject to a considerable amount of taxation under the ETD and VAT regime. While ­explicit carbon pricing only accounts for a minor part of the mineral oil price paid by consumers, energy taxes – which can be considered implicit carbon taxes – and the VAT– which is also levied on the taxes – account for about half of the consumer price of petrol and diesel. Until 2025, the carbon pricing system would drive up energy prices by up to EUR 0.18 (carbon price and VAT) per liter, indicating a price increase of 19% at constant energy taxes and net prices.

4 Impact of Austria’s carbon pricing system on inflation and distribution

4.1 Inflation impact of the Austrian carbon pricing system

Assuming full and immediate transmission, carbon pricing starting in mid-2022 would raise energy price inflation directly by about 2 percentage points and HICP inflation by about 0.15 percentage points in 2022 (see chart 6, right-hand panel). In 2023, the effect of carbon pricing will be 2.7 percentage points on energy price inflation and 0.2 percentage points on HICP inflation, given the originally planned mid-year start date in 2022 and the mark-up applicable from 2023 (EUR 5 per ton of CO2). ³⁶ In 2024 and 2025, the inflationary effect of the carbon price will still be 0.1 percentage point for overall HICP inflation and 1.3 percentage points for energy inflation. It should be noted that these impacts are based on the assumption that the price stability mechanism built into Austria’s carbon pricing system will not kick in (see section 3.3 above). ³⁷

With regard to the carbon pricing system that Germany started to phase in in 2021, the Bundesbank estimates the direct and indirect impacts of carbon taxation on inflation to reach up to 0.3 percentage points in the short run (2021 and 2022). ³⁸ Following full rollout, Nöh et al. (2020) estimate the direct and indirect effects on German consumer price inflation to range from 0.2 to 1.0 percentage points in the period from 2021 to 2026.

However, what happens beyond the short run? In case of substantial carbon taxation, there might also be negative indirect effects on consumer spending and competitiveness. As consumer prices rise, real income and hence consumption ­opportunities could decrease, and wage claims might go up. Furthermore, production costs could also rise via wage increases and transport costs, potentially hitting the competitiveness of the domestic economy. At the same time, incentives for firms to invest in carbon-neutral production capital could stimulate aggregate ­demand. While no estimates for the long-term inflationary impact are available for Austria, some recent empirical estimates suggest that no inflationary effects might follow in the medium to long run. McKibbin et al. (2021) estimate the impact of a EUR 40 carbon tax (with 30% emission coverage) to increase headline inflation by 0.26 percentage points contemporaneously and by about 1.0 percentage point in the second and third year. Beyond this horizon, the impact is still positive, yet statistically insignificant. For core inflation, the authors find that carbon taxation has a negative, yet not always significant impact over the whole horizon investigated (up to six years ahead). The authors take this as an indication that relative prices change (energy inflation goes up while nonenergy inflation goes down). Konradt and Weder di Mauro (2021) arrive at similar overall results. They empirically show that in the medium to long run, carbon taxes in Europe were not inflationary but only changed relative prices.

4.2 Distributional impact of the Austrian carbon pricing system

In the case of transport fuel, the absolute cost burden is higher for richer households as the expenditure share of transport fuels increases with income. According to Budgetdienst (2019) estimates, the absolute burden arising from the carbon price for transport fuels roughly doubles from the lowest quintile to the highest income quartile. As a share of income, however, the tax burden is again higher for low-income households. Carbon tax impacts differ also across regions. Households living in urban areas are likely to be less negatively affected than those in rural areas. City inhabitants spend less on transport and heating fuels (Budgetdienst, 2019). Moreover, they can switch to public transport while inhabitants in less urbanized regions are often compelled to use private transport to commute to work or satisfy basic needs. The “climate bonus” implemented in 2022 was initially designed to smooth such regional differences.

5 Concluding remarks

We estimate the direct impact on consumer price inflation of the forthcoming Austrian carbon tax to range between 0.1 and 0.2 percentage points annually from 2022 to 2025. This direct impact, however, could be exacerbated by possible indirect effects due to the pass-through of higher production costs and possibly higher wage claims. In the medium to long run, the energy mix as well as energy efficiency will change during the green transition as a consequence of changes in relative prices for different energy sources. Firms will find it increasingly important to invest in and develop green technologies to obtain an advantage over competitors pressed to pass on production costs driven up by rising carbon prices or competitors operating at lower profit margins. During the transition phase, prices for fossil fuels as well as EU allowance prices are expected to rise in any policy scenario. ⁴⁰ Moreover, prices are likely to remain highly volatile until renewable energies can largely meet energy demand, and fossil fuels are substituted substantially.

With record inflation rates today, isolating the individual causes is a challenge. The release of pent-up demand during the recovery from the pandemic, associated supply bottlenecks and not least the war in Ukraine are currently more significant inflation drivers than ambitious climate policy measures. All these causes affect energy price inflation in particular. To compensate for the inflation hike to some degree, a number of EU member countries have considered and recently gone ahead with lowering taxes for motor and heating fuels, including the suspension of carbon pricing. This strategy is counterproductive, however, because it removes the incentive to consume less energy and could eventually thwart the price effect if applied everywhere. If policymakers want to protect low-income households from the effects of energy price inflation, direct (means-tested) transfers might be better suited.

Prices play a key role to ensure that in the medium to long term consumer behavior changes and households switch to public transport, e-mobility or more energy-­efficient housing. Changes in consumption patterns and demand will result in changes of the weights of the different energy components in the HICP basket and impact inflation. Carbon pricing (and other climate change policy measures) ideally change relative prices without overall inflationary consequences. Apart from unrealistically perfect market conditions, the ideal case relies on two additional aspects. First, the carbon tax revenues need to be redistributed to households and firms in an appropriate way. Second, monetary policy might need to indirectly support the climate change policies by preventing long-term inflation expectations from moving upward and second-round effects from unfolding. To do so, central banks should not counteract the relative price changes and clearly communicate their strategy to the public. However, if carbon pricing were to drive up inflation over the medium term, a monetary policy response to meet the price stability target would be warranted (Schnabel, 2022).

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Where have all the insolvencies gone?

Helmut Elsinger, Pirmin Fessler, Stefan Kerbl, Anita Schneider, Martin Schürz,
Stefan Wiesinger, Michael Wuggenig ⁴¹
Refereed by: Karl-Heinz Götze, Kreditschutzverband von 1870

Like in many other industrialized countries, government support programs kept corporate ­insolvency rates below pre-crisis levels in Austria in 2020 and 2021, and continued to do so in 2022 in all months for which data were available at the time of writing (up to July 2022). From information available to the OeNB, we built a firm-level database to examine whether the lower rates of insolvencies were offset by higher rates of firms exiting the market without ­insolvency and/or lower rates of firms entering the market. We find the number of firm exits without insolvency to have gone down as well, whereas firm entries remained rather stable in 2020 and increased markedly in 2021.

On the assumption that the pandemic support payments were designed to keep vulnerable firms in business, our corporate balance sheet data suggest that the support was lavish and probably not targeted enough. To further substantiate our findings, we cross-check our database with the European Commission’s state aid transparency database. The evidence at hand suggests that a rather large share of the public support payments ultimately appears to have increased firms’ deposits, respectively their liquidity buffers, in a highly uncertain environment, and even equity, rather than having to be spent to keep businesses afloat. With the benefit of hindsight, government support provided in 2020 can, therefore, to a large extent be interpreted as compensation for losses due to state-imposed lockdowns or public transfers to equity holders for the build-up of risk buffers. Put differently, the full extent of government support does not seem to have been crucial for keeping firms in existence.

Looking ahead, more transparency with regard to firm-level pandemic support payments is a necessary precondition for gaining a deeper understanding of the impact of public support on the structure of the business sector and corporate balance sheets, competition, innovation and financial stability. These insights could help in improving measures for current and future crises.

JEL classification: L11, L25, H32, H25, G33, G38

Keywords: firms, insolvencies, COVID-19, firm entries, firm exits, policy evaluation, government subsidies

Note that in one important respect our data differ from comparable figures provided by Kreditschutzverband von 1870 (KSV 1870) or Österreichischer ­Verband Creditreform (Creditreform). We explicitly exclude sole proprietors and work with a well-defined set of firms, namely all entities included in the Austrian business register other than registered sole proprietors in Austria. Our database therefore consists mostly of limited liability companies, limited partnerships, ­general partnerships and stock corporations ⁴² . (See box 1.)

There are some major caveats to our analysis as our data allow us to answer the questions we pose with decreasing robustness. While we can answer the question regarding insolvencies (question 1) rather precisely and in detail up to the most recent months, the remaining two questions are more difficult to tackle based on the information we have access to. These data limitations unfortunately relate to both data quality and timeliness. While information on firm entries is rather straightforward to retrieve, we rely on year-end data for firm exits (question 2). That is why we cannot analyze the second question beyond the end of 2021. ­Regarding government measures and their impact on corporate balance sheets (question 3) we face several data limitations: First and foremost, we still have only very limited access to comprehensive firm-level data on government support ­measures. The European Commission’s transparency database covers only grants and guarantees exceeding EUR 100,000 (EUR 10,000 for agricultural firms) and excludes compensation payments for short-time work. Second, balance sheet data come with a severe time lag and have some missing data items that we describe in our analysis. That is why we can use the balance sheet data only up to the end of 2020 and for a limited share of firms. Nevertheless, when combined, the available aggregates and the balance sheet microdata allow us to create some suggestive ­evidence and give a preliminary answer to our research questions. Our findings are, moreover, supported by regulatory bank data, as available until the end of 2021.

Our results, which exclude sole proprietorships as mentioned above, can be distilled down to three answers:

First, insolvencies among firms excluding sole proprietorships are still below pre-pandemic levels, even based on the most recent (July 2022) absolute figures. We do not observe any catch-up effect so far. However, this is a phenomenon ­witnessed in many industrialized countries.

Second, we also observe lower exits without insolvency. Thus, such exits are far from compensating for lower insolvencies. Firm entries on the other hand were somewhat below trend growth in 2020 but increased above the long-term trend levels in 2021.

Third, the aggregates suggest that firms’ deposit balances (i.e. cash and cash equivalents including bank deposits), respectively their liquidity buffers, increased during 2020 roughly by the amount of government support businesses received during that time. An analysis of individual balance sheets shows that this was not due to a few particularly large firms. If the pandemic-related support measures were solely aimed at keeping vulnerable firms in business, which we presume, our findings suggest – with the benefits of hindsight – that the measures were lavish and probably not targeted enough. ⁴³

A notable case in point is the fact that – to a large degree – the financial support increased liquidity and equity beyond pre-pandemic levels and in comparison to firms not receiving support, rather than being needed to cover costs. We call for further in-depth analyses to evaluate the impact of these measures on the structure of the business sector and on corporate balance sheets, competition, innovation and financial stability. It takes comprehensive firm-level data on all government measures to conduct this analysis. Such data are needed.

1 Insolvencies remain well below pre-pandemic levels

One example is Germany. As noted by the Deutsche Bundesbank in its December 2021 report, the number of corporate insolvencies dropped substantially in 2020 despite the pandemic. Bundesbank staff experts conclude that the insolvency figures reflect the impact of government support. Under pandemic regulations, Germany temporarily suspended obligations for businesses to file for insolvency if they became insolvent or overindebted in 2020. As a result, the number of insolvencies dropped sharply, above all in the services sector, despite a sizable decrease in sales (Deutsche Bundesbank, 2021). At the same time, government support measures drove enterprises’ liquidity levels significantly upward. On balance, ­enterprises absorbed the shock from the coronavirus pandemic better than anticipated by many economic experts. The Deutsche Institut für Wirtschaft ⁴⁶ arrived at the very same reasons for the low insolvency rates in Germany: fiscal policymakers rolled out extensive financial assistance packages and public authorities temporarily removed insolvency filing requirements.

The magnitude of the effect is evident from figures compiled by the ifo Institute for the German finance ministry:

“Taking the historical relationship between business activity and insolvency developments into account, our estimates indicated that the likely claims arising from applications for insolvency proceedings should have risen to somewhere between EUR 60 and 100 billion. Instead, they rose to just EUR 48 billion in 2020, up from EUR 34 billion in 2019.”

For Austria, chart 1 shows the yearly cumulative incidence of firm-level insolvencies as recorded on a day-by-day basis from the beginning of 2019 to the end of July 2022. As is well known, insolvencies decreased right from the start of the first lockdown despite the large economic shock due to the pandemic. Since then, many experts and institutions (including the OeNB) have forecast and warned of a wave of upcoming insolvencies exceeding pre-crisis levels for several reasons: the ­economic shock itself, rising uncertainty and a catch-up process compensating for the lower number of insolvencies in the early days of the pandemic. As the ­pandemic went on, lockdowns were legislated and suspended, and a plethora of government measures were taken to help firms to survive. However, so far the data suggest neither a wave of insolvencies nor any form of catch-up process with regard to ­insolvencies. Thus, the answer to our question (1) is rather straightforward: the absolute numbers of insolvencies remain below the pre-crisis levels.

On the one hand, it could be argued that this shows the success of state intervention to support Austrian firms in a difficult time of government-imposed lockdowns. On the other hand, there are several reasons why one should be cautious about calling for maximal firm survival – especially in times of crisis. We would like to mention three reasons here.

First, saving firms is costly. Reallocating taxpayers’ money to the business ­sector may be justifiable if it is indeed needed to keep firms in existence that
are relevant to society because they serve essential consumer needs (directly or within a production chain), if they would most likely not survive without the ­subsidy and if they were to leave a gap that cannot be filled by competitors or newcomers.

Second, there are unseen consequences to (potential) competitors. After all, subsidies provided to some firms put unsubsidized (potential) competitors at a ­disadvantage and prevent new competitors from entering markets. In particular, such subsidies rob firms that were well prepared for a crisis and not eligible for public support of their deserved advantage in the market, thus prohibiting the ­development toward a more resilient economy.

Third, a classical prediction of public choice theory is that large subsidy ­programs, especially when designed and implemented quickly and in a rather ­nontransparent way, tend to create a poor incentive structure in terms of efficiency. This happens through a distortion in competition usually for the benefit of firms with direct or indirect ties to relevant political decision makers or access to special interest networks or insider information.

All three issues tend to foster a less dynamic, less innovative business sector and come with a price tag, not only because of the direct monetary cost of the ­subsidies but mostly because of the long-term effects on innovation and competition. Market economies cannot function if markets are welcomed as long as profits are high but are canceled when crisis hits, and profits are low. Rational firms anticipate government intervention and will crowd out firms with more resilient forward-­looking business models. Generally speaking, privatizing profits but socializing losses is not supporting the market economy but makes it less successful in satisfying people’s needs and more vulnerable to crisis in the future. ⁴⁷

2 Lower insolvencies were not offset by exits and entries

Table 1 shows a short summary of exits, entries and insolvencies for 2019, 2020 and 2021 as well as the insolvency-to-exit ratio and the overall number of firms. Note that for table 1 we excluded all entities for which data on the legal form were missing. For alternative numbers including those entities see table A1 in the annex. The absolute numbers of exits and the overall numbers of firms are different, but this is not relevant for our main results, namely that the development of exits shows no compensation for fewer insolvencies.

In total, firm entries exceeded exits and insolvencies combined in both 2020 and 2021. Insolvencies accounted for about 24% to 32% of exits, implying that the number of non-insolvency-­related exits was about 2–3 times larger than the number of insolvencies. However, while the number of firm entries was only marginally larger in 2020 than in 2019 but increased markedly in 2021, the number of both insolvencies and ­exits was substantially lower in 2020 than in 2019 and increased only slightly in 2021. While the 2020-to-2019 decrease in insolvencies was about 32%, the decrease in exits was about 12%.

Table 1: Firm entries, exits and insolvencies  

Year	Entries	Exits	Insolvencies	Begin-of- year levels	End-of- year levels	Insolvency- to-exit ­ratio
	Thousands					%
2019	15.8	6.8	2.2	227.2	233.8	31.9
2020	16.1	6.0	1.5	233.8	240.7	24.7
2021	18.7	6.1	1.5	240.7	251.7	24.0
Source: OeNB (database of master data).

These results already point to a clear answer to question (2) whether more exits compensated for fewer insolvencies. They did not. On the contrary, the number of firm exits even decreased. Due to the combination of lower numbers of exits and insolvencies with the almost stable (2020) and then strongly positive development (2021) of entry numbers, the number of firms (according to our definition) ultimately increased by about 8% (6% if one uses definitions from table A1) from before the pandemic (end of 2019) until the end of 2021.

As a next step we look closer at the annual development of firm entries (chart 2). While there were fewer ­entries in 2020 than one would have assumed extrapolating from the pre-crisis trend, rising firm entry numbers in 2021 more than compensated for this effect. Overall, the positive long-term trend with regard to firm entries continued – if not accelerated – during the pandemic.

If exits without insolvencies cannot explain the drop in insolvencies, what can? In the following we look into balance sheet data (section 3) and then add data on pandemic-related support measures (section 4) to find that these measures were lavish and are likely the main reason for the few insolvencies observed in Austria in 2020 and 2021.

3 Markedly higher increases in deposit and equity levels observed for firms that received pandemic support in 2020

In this section we will analyze balance sheet dynamics in 2018, 2019 and 2020. All in all, our sample consists of 159,590 firms for which total assets are available for at least one year. For 122,715 of those firms, we know total assets across all three years. Compared to the number of firms given in table 1 this number seems small. Yet, these figures include more than 70% of all stock corporations and more than 80% of all limited liability companies. These two most important legal forms of companies represent 70% of all companies in the full sample and are thus well accounted for. The results below are with respect to the subsample of firms for which we know total assets for all three years, i.e., firms that neither entered nor exited the market during this period.

Table 2: Balance sheet developments  

	Aggregate change 2020	Aggregate change 2019	Firm-level median change 2020	Firm-level median change 2019	Coverage	Number of firms
	%					Thousands
Total assets	4.4	3.7	2.6	1.9	100.0	122.7
Fixed assets	2.2	4.1	–1.7	–1.3	96.8	101.0
Current assets	7.8	0.3	6.4	4.2	99.1	121.3
Inventories	–2.0	1.9	0.0	0.0	44.4	53.1
Deposits	17.5	2.4	8.7	0.0	85.5	96.9
Accounts receivable	7.1	–1.0	4.5	2.3	92.9	111.8
Liabilities	1.1	1.1	0.0	0.0	95.9	113.9
Equity	7.5	3.3	5.1	4.9	92.5	121.6
Source: OeNB (database of master data), European Commission (state aid transparency database).

Table 2 summarizes aggregates of key balance sheet items for 2019 and 2020. Our dataset does not include each and every item for each firm. The “coverage” column exhibits the scope of assets or liabilities covered compared with the corresponding totals for all 122,715 firms. The “number of firms” column shows the number of firms for which we have information on the respective item in each of the three years.

Aggregate total assets increased by 3.7% from 2018 to 2019 and by 4.4% from 2019 to 2020. The median growth rate was 2.6% in 2020 and 1.9% in 2019. The strong growth in current assets was not driven by inventories, which declined by 2% in 2020 after a 1.8% increase in 2019. Cash and cash equivalents including bank deposits – deposits for short in the following – increased by as much as 17.5% in 2020, and accounts receivable by 7.1%. On the liability side of the balance sheet, equity increased by 7.5% in 2020 compared to 3.3% in 2019 whereas liabilities ⁴⁸ remained broadly unchanged. Was the increase in deposits driven by a few outliers or was it a broader phenomenon? When we group the data by provinces, by NACE codes, and by firm size, we find that

Table 3: Change in corporate deposits by province  

	Aggregate change 2020	Aggregate change 2019	Firm-level median change 2020	Firm-level median change 2019	Number of firms
	%				Thousands
Burgenland	30.1	16.1	14.6	0.0	2.3
Carinthia	22.1	4.4	12.4	0.0	5.5
Lower Austria	34.4	3.7	12.7	0.0	14.5
Upper Austria	19.9	10.9	11.7	0.0	13.7
Salzburg	4.6	7.8	6.2	0.2	7.9
Styria	34.2	5.1	12.5	0.0	11.5
Tyrol	5.9	5.1	8.4	3.0	8.1
Vorarlberg	24.4	-0.6	7.1	2.3	4.7
Vienna	12.0	-3.2	3.6	0.0	28.8
Source: OeNB (database of master data).

Table 4: Change in corporate deposits by NACE code  

		Aggregate change 2020	Aggregate change 2019	Firm-level median change 2020	Firm-level median change 2019	Number of firms
		%				Thousands
C	Manufacturing	41.8	9.0	14.9	0.3	8.1
D	Electricity, gas, etc.	1.1	–18.5	2.1	1.8	1.0
E	Water supply; sewerage, waste management	14.1	0.5	9.6	2.1	0.4
F	Construction	13.3	11.7	10.4	0.5	10.1
G	Wholesale and retail trade; repair of vehicles	19.5	10.0	16.5	0.0	18.6
H	Transportation and storage	33.5	–2.9	12.5	0.0	3.2
I	Accommodation and food service activities	6.7	9.2	3.8	0.5	6.2
J	Information and communication	28.4	8.0	14.9	3.5	5.5
K	Financial and insurance activities	4.2	1.5	7.7	0.0	1.7
L	Real estate activities	10.8	–1.6	1.3	0.0	14.0
M	Professional, scientific and technical activities	10.7	–2.2	2.9	0.0	19.9
N	Administrative and support service activities	12.7	3.0	5.8	0.7	3.9
P	Education	15.3	3.6	15.6	3.7	0.7
Q	Human health and social work activities	8.4	12.6	14.5	7.2	1.2
R	Arts, entertainment and recreation	9.2	–11.8	7.9	0.0	1.6
S	Other service activities	20.0	16.8	19.6	0.0	0.7
Source: OeNB (database of master data).

Table 5: Change in corporate deposits by balance sheet decile  

	Aggregate change 2020	Aggregate change 2019	Firm-level ­median change 2020	Firm-level ­median change 2019	Number of firms
	%				Thousands
1	–39.1	–25.9	–9.4	–12.1	12.1
2	–13.4	–24.1	0.0	0.0	12.4
3	2.2	–0.1	8.2	0.0	12.2
4	6.4	8.3	12.2	3.8	12.3
5	11.6	5.9	15.3	2.4	12.2
6	7.4	16.2	16.3	4.2	12.3
7	15.6	7.1	15.8	4.7	12.3
8	15.1	8.4	15.3	4.5	12.3
9	14.9	7.9	13.9	3.6	12.3
10	19.3	0.8	10.4	2.6	12.3
Source: OeNB (database of master data).

To additionally validate our findings that large firms saw a more pronounced increase in deposits (even relative to their size), we also draw on regulatory data reported by banks. Cash positions of households and firms are found on the liability side of banks and the data allow for a breakdown into “micro and SME,” “corporates” (i.e., firms that do not fall under the former) and households. In 2020, banks recorded a large inflow of deposits from all three groups. The outstanding deposits of corporates rose by as much as 22.9%, followed by household deposits (+9.4%) and SME deposits (+7.9%). The robust increase in corporate deposits continued in 2021 (+13.5%). Household deposits increased at an even stronger rate (+14.6%) while SME deposits stagnated (–0.4% growth).

Our finding is even more surprising as sales revenues for the firms in our ­sample decreased by 6.6% in 2020 compared to an increase of 2.5% in 2019. Hence, the increase in highly liquid assets might well have been driven by government subsidies, a hypothesis we further investigate with micro data on pandemic-­related support below.

4 Transparency data on pandemic support measures confirm balance sheet dynamics

Table 6: Descriptive statistics of firm-level data merged mith state aid transparency data  

	Euro amounts	Number of firms	Euro amounts (merged)	Number of firms (merged)	Coverage in euro	Coverage in counts
	Thousands				%
Guarantees	2,919,616	5.8	2,428,171	4.1	83.2	70.9
Grants	1,436,302	4.7	1,171,324	3.5	81.6	74.0
Source: European Commission (state aid transparency database) and OeNB calculations.

How do firms that received help and those who did not compare in terms of various balance sheet items? We classify all firms for which we do not have observations in the pandemic support database as firms that did not receive any government help. This is certainly not correct. Given the threshold of EUR 100,000 underlying the transparency database, there are many (smaller) firms that received lower amounts of support, yet we do not have access to such information up to now. A second issue that must be kept in mind is that the subsample of firms that received support is tilted toward larger firms because of the threshold. Table 7 summarizes the results for those firms that received grants. Total assets, current assets, deposits and accounts receivable increased more than in the full sample. On the liability side, both liabilities and equity increased. The median increase in ­liabilities was moderate. Table 8 shows the corresponding results for firms that were granted guarantees. Here, the picture is similar, with the difference that the median increase in liabilities was quite pronounced.

Aggregate deposits increased by about 62% for firms that received grants and 121% for those who received guarantees (tables 7 and 8) compared to 18% (table 2) in the full sample. This seems not to be due to larger firm size only. Even in the highest balance sheet decile, deposits only increased by 19% (table 5). The same pattern holds for firm-level median changes.

And the pattern is not different for equity. Firms receiving grants increased their equity levels on average by 18.1% in 2020 (table 7), which is well above the rate for 2019 and more than twice as much as the full sample rate (7.5%, table 2). Again, the same pattern holds for firm-level median changes.

For firms in urgent need of funding support, one would expect low levels of deposits and stable or decreasing equity levels following the receipt and use of subsidies to “help them pay outstanding bills.” These firms, however, show even larger increases in deposits than their counterparts who did not receive such support, which is suggestive evidence that the support received exceeded ­actual needs as considerable sums went unspent.

This ties in with results from a survey ⁵⁰ among about 1,100 companies which was administered by KSV 1870 in August 2021 and published in October 2021. Of the 54% of companies which stated that they received state support, only 61% answered that they actually relied on this support. 34% stated that they did not need the support and 5% refused to answer the question.

Table 7: Balance sheet dynamics measured for firms receiving grants  

	Aggregate change 2020	Aggregate change 2019	Firm-level ­median change 2020	Firm-level ­median change 2019	Number of firms
	%				Thousands
Total assets	12.1	4.4	7.2	2.3	3.1
Fixed assets	0.7	8.3	–4.7	–2.7	3.1
Current assets	28.3	–1.0	22.7	6.8	3.1
Inventories	–6.3	4.5	–6.9	2.1	2.7
Deposits	61.6	–3.7	19.1	6.7	3.0
Accounts receivable	40.0	–5.1	41.6	4.7	3.1
Liabilities	12.4	3.4	1.4	–1.4	3.1
Equity	18.1	5.6	12.8	9.3	2.4
Source: OeNB (database of master data), European Commission (state aid transparency database).

Table 8: Balance sheet dynamics measured for firms receiving ­guarantees  

	Aggregate change 2020	Aggregate change 2019	Firm-level ­median change 2020	Firm-level ­median change 2019	Number of firms
	%				Thousands
Total assets	8.2	4.6	10.2	3.2	3.7
Fixed assets	1.0	4.8	–3.3	–0.8	3.6
Current assets	14.8	4.1	20.4	5.1	3.7
Inventories	1.4	6.1	–1.2	3.5	3.0
Deposits	120.7	–5.8	71.1	0.0	3.2
Accounts receivable	4.3	4.2	18.0	5.8	3.6
Liabilities	15.9	3.5	15.1	1.1	3.7
Equity	5.9	7.6	7.6	9.5	2.9
Source: OeNB (database of master data), European Commission (state aid transparency database).

5 Conclusion

In July 2022, the Austrian government announced an initiative ⁵² for more transparency about firm-level pandemic support measures. ⁵³ Such data are a necessary precondition for gaining a better understanding of the impact of policy measures on the structure of the business sector and corporate balance sheets, competition, innovation, and financial stability. And finally, such analyses are crucial to refine policy measures for future crisis to avoid a potential misallocation of public ­resources.

References

Barmeier, M. and M. Haller. 2022. Changes in banks’ rating assignments in response to the COVID-19 pandemic. Financial Stability Report 43. OeNB. 61–71.

Claeys, G., M. Hoffmann and G. Wolff 2021. Corporate insolvencies during COVID-19: ­keeping calm before the storm. Bruegel Blog. January 7.

Elsinger, H., P. Fessler, S. Kerbl, A. Schneider, M. Schürz and S. Wiesinger. 2021. Calm before the storm? Insolvencies during the Covid-19 Pandemic. Financial Stability Report 41. OeNB. 57–76.

Fessler, P. and M. Wuggenig. 2021. Exits and entries of Austrian firms during the pandemic – preliminary results. Konjunktur Aktuell December 2021. OeNB. 48–52. OeNB.

Deutsche Bundesbank. 2021. Ertragslage und Finanzierungsverhältnisse deutscher Unter­nehmen im Jahr 2020. December 2021. 45–63.

Ifo Institut. 2020. Ein Fünftel der deutschen Firmen hält sich für gefährdet. Press release. https://www.ifo. de/node/56536.

Ifo Institute. 2021. Fewer insolvencies than expected in 2020. Press release.

IWH – Leibnitz Institute für Wirtschaftsforschung Halle. 2022. IWH-Insolvenztrend: Erneut viele Industriejobs von Insolvenz betroffen.

Köppl-Turyna, M., J. Berger, N. Graf, P. Koch, W. Schwarzbauer, L. Strohner and M. Wolf 2021. COVID-19 Maßnahmen Stand der Maßnahmenauszahlung und internationaler Vergleich von COVID-19 Stützungsmaßnahmen vor dem Hintergrund der unterschiedlichen Bedeutung automatischer Stabilisatoren. Eco Austria: Institut für Wirtschaftsforschung.

Annex

Table A1: Entries, exits and insolvencies including entities with ­missing legal form  

Year	Entries	Exits	Insolvencies	Beginning-­of- year ­levels	End-of- year levels	Insolvency-to-­ exit ­ratio
	Thousands					%
2019	15.8	11.8	2.2	373.3	380.9	18.3
2020	16.1	9.4	1.5	380.9	390.2	15.7
2021	18.7	10.2	1.5	390.2	403.8	14.3
Source: OeNB (database of master data).

Table A2: Pandemic-related upport measures included in the analysis  

Specifications	Number of ­entries	Amount in EUR millions
COVID-19: Austrian liquidity assistance scheme	12,123	39,24.3
COVID-19: Third amendment to aid scheme SA.56981 (2020/N): Austrian guarantee scheme for bridge loans under the Temporary Framework for pandemic-related state aid for businesses	5,046	1,578.4
COVID-19: Austrian guarantee scheme for bridge loans	1,580	492.3
COVID-19: Compensation scheme: directive on fixed cost subsidies	906	232.6
COVID-19: Austrian liquidity assistance scheme (SA.56840): fixed cost compensation under chapter 3.12 of the ­Temporary Framework for pandemic-related state aid for businesses (SA.58661)	899	18.4
COVID-19: Fourth amendment to aid scheme SA.56981 under the Temporary Framework for pandemic-related state aid for businesses	306	448.2
COVID-19: Fifth Amendment to aid scheme SA.56981	234	70.0
COVID-19: Regional support measures (Carinthia, Styria, Tyrol, Upper Austria and Vienna)	142	8.9
COVID-19: Regional support measures (Carinthia, Upper Austria, Styria, Tyrol and Vienna)	79	2.7
COVID-19: SA.60321(2020/N) compensation scheme: directive on fixed cost subsidies for economic activities of ­ nonprofit organizations (SA.57928 (2020/N))	58	13.6
COVID-19: Sixth amendment to aid scheme SA.56981	40	12.3
COVID-19: Compensation scheme: directive on fixed cost subsidies for economic activities of nonprofit organizations	37	12.9
COVID-19: Startup aid fund	26	17.4
COVID-19: Prolongation of SA.58360 aid scheme: grants and guarantees from the Lower Austrian Economic and Tourism Fund	14	8.5
COVID-19: Fixed cost compensation under chapter 3.12 of the Temporary Framework for pandemic-related state aid for businesses	13	3.3
COVID-19: Modification of SA.57148 (2020/N): regional support measures (Carinthia, Upper Austria, Styria, Tyrol and Vienna) under the Temporary Framework for pandemic-related state aid	9	0.4
COVID-19: Compensation scheme: directive on fixed cost subsidies for economic activities of nonprofit organizations	8	1.8
COVID-19: Funding from the Lower Austrian Economic and Tourism Fund (SA.58360)	6	5.5
COVID-19: Prolongation of SA.57928 (2020/N): compensation scheme: directive on fixed cost subsidies for economic activities of nonprofit organizations	3	0.4
COVID-19: Aid for Austrian Airlines	1	150.0
COVID-19: Grants from the Lower Austrian Economic and Tourism Fund (SA.100853)	1	0.3
Total	21,531	7,002.1
Source: OeNB (database of master data).

The return of inflation

Key findings from the 49th OeNB Economics Conference and the 35th SUERF Colloquium (May 23/24, 2022) ⁵⁴

Ernest Gnan, Kilian Rieder (OeNB and SUERF); Teresa Messner, Fabio Rumler, Mirjam Salish (OeNB), ⁵⁵

Against this background, on May 23 and 24, 2022, some 750 participants ­attended – either in person at the premises of the OeNB in Vienna or online – the 49th OeNB Economics Conference and the 35th SUERF Colloquium to discuss the underlying drivers of inflation, short- to medium-term prospects for price ­developments, policy implications and the latest findings from economic research to shed light on these issues. The conference brought together 37 top expert speakers and decision makers from central banking, the finance industry and academia.

Instead of following the sequence of presentations outlined in the conference program , this report aims to extract key insights by grouping the topics under three overarching themes: first, longer-term trends and drivers of (global) inflation (i.e., ­demographics, (de-)globalization, climate change and protection); second, the role of inflation perceptions and expectations and the use of granular price data to improve our understanding and forecasting of inflation; and third, lessons for policy.

1 Long-term drivers of (global) inflation: aging, (de-)globalization and climate change

In the longer term, inflation will be driven by structural forces, including aging…

Pradhan then analyzed the current inflation surge considering the arguments previously presented. The response to this surge depends on how large the disturbances are. Expectations, wages and prices react to what is happening right now, which means that it is important to act holistically here and now, instead of solely focusing on future inflation expectations. Bringing inflation back to its target will be a demanding task for central banks, as curbing inflation might result in high unemployment. Stagflation may pose a challenge to central bank independence, result in a possible fragmentation within the EU and have adverse effects on ­politics in general (e.g., high food inflation can easily derail governments and the World Bank argues that food prices will rise until 2024).

…(de-)globalization…

According to James, higher inflation in times of supply shocks does not ­necessarily suggest that globalization is on the retreat. It rather indicates that more globalization is needed. Historically, inflation has been pushed by three factors: (i) fiscal dominance and (ii) financial dominance, which both imply that central banks must keep interest rates low if they want to avoid a financial crisis or sovereign ­default; and (iii) social dominance, which results in inflation being used to “buy” social peace. Given the widespread consensus that high inflation is traumatic and undesirable, as it is a strain on federal systems and leads to distributional conflicts, central banks should guarantee price stability. Historically, episodes of high inflation were followed by a return to monetary policy keeping prices and expectations ­under control (as was the case with the gold standard or the inflation targeting ­regime of the 20th century). The demand for stability, including social stability, cannot be met by the private sector.

Globalization has a big impact on inflation. It has reduced the long-run level of inflation and it has altered the relationship between economic slack and inflation. According to James, economists that claim otherwise err on the question of when globalization began. Many assume that it was at the beginning of this century, when China was admitted to the World Trade Organization, but, in fact, globalization began much earlier. We can identify two phases when globalization took off – after the 1970s and after the 1840s. In light of supply shocks caused by crop ­failures across Europe in the 1840s, the view emerged that Europe needed more trade to gain wider access to resources. In the 1970s, the initial reaction to supply shocks was protectionism. Only gradually did the idea that an open world would be better for everyone develop. As the world is facing major challenges, including the COVID-19 pandemic and the war in Ukraine, low inflation again is under threat. Shifts in labor and energy markets pose a challenge to the provision of fiscal relief packages; shifts in relative prices following technology and supply shocks pose a challenge to inflation targeting; and finally, costs of government borrowing are much more uncertain. When asked about the factors that will push globalization this time, James pointed to the fact that each globalization period is different. This time, it will be future artificial intelligence, electronic communication and the globalization of services that will characterize the new period of globalization. In James’ view, more globalization is needed and will materialize in the future.

…and climate change and protection

2 What role do inflation perceptions and expectations play, and how can granular price data improve inflation analyses and forecasts?

Inflation expectations are heterogeneous across agents and driven by psychological and sociodemographic factors

A panel of top economists from the ECB, Amundi Asset Management and the University of Chicago, moderated by Ernest Gnan, Head of the OeNB’s Monetary Policy Section, discussed what role inflation expectations play for the path of ­inflation, what drives inflation expectations and whose inflation expectations should be monitored. Pascal Blanqué, Chairman of the Amundi Institute, ­emphasized the role of psychology as a driver of inflation expectations of financial market ­participants. He argued that financial markets are going through a regime shift from financial capital to physical assets, which has the potential of driving up inflation in the future. Blanqué furthermore argued that, despite their hawkish tone, central banks are behind the curve of the tightening cycle, which leads to a repricing of portfolios and risk on financial markets. Geoff Kenny, Head of Section of the ECB’s Monetary Policy Research Division, presented new results on inflation ­expectations in the euro area, obtained from the Consumer Expectations Survey conducted by the ECB. Medium-term inflation expectations (three years ahead) have remained broadly stable at 2% since April 2020, and have only recently, i.e. in March 2022, increased to 3%. Making use of a randomized controlled trial study designed to analyze the effect of communication on inflation expectations and central bank credibility, ECB researchers found that communication on the symmetric 2% price stability target, including broader explanations of the target’s role and of monetary policy in general, significantly increases the credibility of central banks and has a dampening impact on inflation expectations. Michael ­Weber, Associate Professor at the University of Chicago, reviewed inflation expectations of households and firms, drawing on different data sources used in his research. He emphasized the large heterogeneity in individual inflation expectations: These were found to be higher for the main grocery shoppers in the household (mostly women), for respondents with lower IQ scores and for those exposed to higher actual inflation (poorer households). Weber also showed that inflation expectations of firms are not very different from those of households.

Inflation perceptions and expectations of households and firms are similar and driven by the same forces

New advances in inflation forecasting and inflation (expectations) modeling

Micro, scanner and webscraped price data enhance inflation analyses

3 Lessons for policy

Inflation is a major concern for citizens and policymakers alike

SUERF President Jakob de Haan offered a more academic perspective on the recent return of inflation. When it comes to tightening monetary policy ­conditions, the ECB may lag behind compared, in particular, to the US Federal Reserve and the Bank of England; yet, de Haan also acknowledged that underlying second-round price pressures may still be weaker in Europe. As a case in point, euro area wages have not picked up at the same pace as elsewhere recently. He closed with a plea for more discussions on current cross-country differences in inflation levels and ­recalled the weaknesses of the standard New Keynesian framework for modeling and forecasting inflation.

Why did central banks fail to see inflation coming?

According to Claudio Borio, Head of the Monetary and Economic Department at the Bank for International Settlements (BIS) and SUERF Fellow, the BIS – like most observers – had also been surprised by the strength and persistence of inflation. In his view, we need to be very humble when trying to understand ex post what we did wrong. The current surge in inflation is due to many post-pandemic factors. We underestimated pent-up demand; the shift from demand for goods to demand for services was more persistent than thought; and global supply bottlenecks were stronger and more persistent than anticipated. The war in Ukraine
– which resulted in a huge negative supply shock – had not been expected either. Furthermore, what may appear as a supply shock from individual countries’ ­perspectives, may in fact be a demand shock at the global level. The way expectations are modeled by the Phillips curve implies that bygones are bygones. In ­negative terms-of-trade shocks, however, one might try to recover purchasing power losses, and this can create a self-propelling inflation process. Finally, there are no non-linearities in the Phillips curve in the sense that inflation itself may propel inflation. Once inflation moves out of the realm of rational inattention and moves into focus, the inflation process can become more entrenched. What is ­important now is that we do not repeat past mistakes going forward. Monetary policy was constantly trying to push up inflation in pre-COVID-19 times, which was very hard to achieve. But with the current shocks, monetary policy may or may not accommodate the rise in prices. In many countries, demand is below what it would have been in the absence of the COVID-19 shock. In other countries, ­output is higher than in pre-pandemic times. It is not only the level but also the speed of output growth that matters, however. If supply does not respond at the same speed, inflation will rise.

According to Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, the shift in central banks’ monetary policy strategies toward make-up strategies was motivated by the proximity to the zero lower bound on interest rates. Pre-pandemic inflation expectations had been on a downward trend; the Phillips curve had gradually flattened. Developments in the US have been different from other countries in this respect, however. While output is back to the pre-pandemic level in the UK, it is clearly above that level in the US. The link between money supply and inflation is far from clear. These days, supply shocks are the key drivers of inflation. Central banks have been facing a ­sequence of severe shocks. The risk of recession is quite high in a number of European countries. China’s economy is seriously slowing down. All of this explains why central banks do not act as fast as some might expect them to do. Labor ­markets have largely recovered in many countries (albeit to different degrees), ­creating potential for upward wage pressures. Central bank credibility is key now, and at very high levels in advanced economies (AEs), which is why the central banks in these countries can look through supply shocks. In emerging market ­economies (EMEs), central bank credibility is lower, which is why the central banks there should not look through supply shocks. Therefore, EMEs tightened their monetary policy stance earlier and more aggressively to react to surging ­inflation; as a result, inflation is coming down rapidly again. In AEs by contrast, due to higher credibility, central banks can react more moderately, all the while being careful to avoid second-round effects.

Do central banks need to fundamentally review their inflation forecasting models?

Why have central banks not reacted as forcefully to inflation as one would have expected?

Claudio Borio pointed to different circumstances in different countries. In Latin America, for instance, a sharp rise in inflation required a strong monetary policy reaction. At turning points, central banks usually wait a bit – there is what is ­referred to as “reversal aversion.” While this is not a good reason, it may partly explain central banks’ behavior. Gradual responses are not mistakes; when ­circumstances change, this needs to be recognized (which takes time) and communication needs to be adjusted gradually. In fact, the size and speed of the surge in inflation surprised the entire economic field and all policymakers alike. Debt levels and financial vulnerability are very high worldwide; financial markets have taken on a lot of risk. Under the current circumstances, a given extent of monetary tightening may have a stronger effect now than in the past. Joachim Nagel recalled that there were some institutions, like the BIS, that highlighted inflation dangers early on. Central banks’ inflation forecasting models failed to adequately deal with structural and serial shocks, however. Andrew Bailey pointed out that shocks have become bigger over time. The current aim must be to bring inflation back to target without undue damage to output. What role should forward guidance play in this context? It will likely be used also in the future, but it should be seriously reconsidered. Turning to financial stability, households’ balance sheets are now more robust to shocks than in the past, due to action taken in the aftermath of the global financial crisis aimed at reinforcing financial stability.

How to deal with financial stability risks arising from monetary tightening in an already fragile situation?

Improving models and paying closer attention to tail risks to avoid inflation crises in the future