Output Growth in Austria and Germany: What Explains the Growth Differentials since the Early 1990s?

This paper attempts to explain the positive growth differential Austria has had over Germany since the early 1990s. While German output growth was dampened in the aftermath of unification, the Austrian economy benefited from a number of positive one-off shocks in the 1990s. Austria has been able to make the most of the opening up of Eastern Europe and witnessed a surge in productivity following EU accession. Moreover, given the predominance of small and medium-sized businesses in Austria, outsourcing abroad was much less of a problem for Austrian employees than for German employees. Finally, Germany saw a marked drop in full-time equivalent employment, which in turn adversely affected consumption and investment. While fiscal policies were not instrumental in generating growth differentials in the 1990s, they have played a role since 2002, as Austria, unlike Germany, has pursued an expansionary fiscal policy course. Differences in the wage-setting process and in corporate taxation provide very little, if any, explanation for the growth differential. Thus, Austria’s positive growth differential basically reflects asymmetric one-off shocks with an effect on current GDP levels rather than on the longterm growth rate. Hence, once the effects of these one-off shocks have subsided, the growth differential is likely to shrink.