The Potential Growth Prospects of the Austrian Economy — Methods and Determinants

In this paper we discuss issues related to the longer-run growth prospects of the Austrian economy. We briefly survey methods commonly applied to estimate the growth potential of an economy. According to currently available estimates, the growth rate of Austrian potential output is roughly 2%.We observe that potential growth has slowed down slightly over the past two decades. Turning to prospects for total factor productivity growth, there have been significant improvements over the last ten years with respect to R&D and trade openness. The impact of dynamic agglomeration gains also depends on the transport infrastructure. Product market competition and entry have markedly improved. Austria still has deficits in the areas of higher education and venture capital. By and large, most indicators — at least their growth rates — point towards good prospects for total factor productivity (TFP) growth. As regards labor supply, we show that demographic projections point to a slowdown in the growth of the working-age population, which in turn may lead to declining growth rates of actual and potential output. Such results are often achieved by using growth equations. This approach probably overestimates the negative effect on total GDP growth. The slowdown of labor supply growth can be mitigated by increasing participation rates. Austria has undertaken significant steps to increase the labor market participation of older workers by a series of pension reforms. After a decline in 2002 labor force growth has been rising steadily since 2003. Moreover, female labor supply has been increasing considerably more strongly than male labor supply.