If one sticks to the classical approach to business cycle dating, which considers only significant declines in economic activity as recessions, it is difficult to rationalise part of the rise in unemployment in Austria. Taking potential output into account and defining recessions as a fall in output below potential of a magnitude of at least two-thirds of the potential growth rate - a definition used by the German Council of Economic Experts - fits the picture better. However, unemployment in Austria has also been affected by labour supply effects, in particular in the early 1990s by the influx of refugees from the disintegrating Yugoslavia (which increased unemployment during an upswing) and from 2012 onwards by the opening of the labour market to new EU members (which exacerbated the rise in unemployment during a recession).

At the height of the global financial crisis in 2008, the procedure for the allocation of central bank funds was changed from a bidding process for limited funds with an uncertain outcome to a safe, full allotment of all funds requested at a fixed interest rate. This led to excess liquidity in the money market and dampened competition for short-term funds. Since then, the ECB's deposit rate has acted as an (elastic) floor for short-term money market rates, as it is generally not profitable for banks to lend money overnight on the interbank market at a lower rate. So while the main refinancing rate was the ECB's key rate from 1999 until the end of 2008, since then it has been the deposit rate.

Recently, fewer and fewer banks have participated in the ECB's main refinancing operations because the interest rate is now high while there is still a lot of excess liquidity in circulation. In order to increase the effectiveness of monetary policy in times of high excess liquidity, the spread between the refinancing rate and the deposit rate was reduced from 50 to 15 basis points in September 2024.

Between October 2022 and April 2024, core inflation in Austria was 2.2 percentage points higher than in the euro area, while real GDP growth was 1 percentage point lower. The higher inflation was mainly due to international demand shocks (high share of tourism-related services recovering from COVID-related restrictions), domestic demand shocks (generous transfer payments to households to compensate for the erosion of real incomes) and domestic supply shocks (few direct price-related measures such as VAT cuts or price caps). A smaller share of over-inflation was due to international supply shocks (Austria's oligopolistic structure of the energy sector exacerbated the gas price shock) and wage shocks (trade unions trying to overcompensate for high inflation rates, see also below).

The sharp acceleration in collective wage growth from January 2023 onwards raised inflation by around ½ percentage point in that month. However, the effect did not last long and faded by March 2023. Thus, over several months, wage increases mostly followed price and output developments. A small proportion of wage increases fed back into higher inflation. 

The more variable-rate housing loans were granted to private households (y-axis), the higher the increase in banks' net interest margin between the second quarter of 2022 (before the key interest rate hikes began) and the first quarter of 2023 (x-axis) in the euro area.

While the number of vacancies soared enormously in the wake of the pandemic, the comovement of unemployment and vacancies (the movement in the Beveridge space) was similar to other strong upswings in the past.

But the recovery from the pandemic was much faster than from previous recessions. Typically, it would take around one and a half to two years after a slump for unemployment to fall as sharply and job vacancies to rise as much as in the first half of 2021. The strength of the 2021 rebound resulted from three factors: First, companies resumed their activities simultaneously and within a very short period, while supply usually increases gradually and production capacities need time to expand. Second, the lockdowns did not weaken households' purchasing power like in "conventional" downturns. Third, fiscal emergency measures were in fact pro-cyclical and added oomph after the re-opening of the economy.

Instead of building up gradually, unemployment rose abruptly during the pandemic and then fell again, in stark contrast to "conventional" downturns in the past. 

A trivarite VAR featuring world commodity prices (in log-levels), world industrial production (in log-levels) and domestic consumer price inflation (y-o-y change of log-levels), 6 lags and a constant is estimated based on a Minnesota prior; the coefficients of consumer price inflation in the equations of world industrial production and commodity prices are shrunk towards zero. World demand and world supply shocks, whose effects on domestic consumer price inflation are shown here, are identified via sign restrictions.

From the outbreak of the pandemic in January 2020 to its temporary peak in May 2020, negative demand-side impulses continuously intensified. At the same time, however, there were also supply-side distortions (the disruption of global supply chains) counteracting the price dampening effect (in March 2020, OPEC's expansion of oil production brought temporary relief).

From June 2020, the recovery in industry added upwards pressure to inflation, but supply conditions were still benign. As of February 2021, they started to worsen again so that both adverse supply-side conditions and positive demand-side developments acted inflationary.

The higher the lockdown intensity (measured by a Blavatnik School of Government's index) in the first wave of the Covid pandemic, the larger the drop in GDP.

While the recession in the second quarter of 2020 depended on the severity of the lockdown (see picture above), the subsequent recovery had less to do with the degree to which lockdown measures were lifted but rather with the depth of the preceding slump.

The higher the level of private sector debt in the run-up to the Global Financial Crisis, the larger the subsequent burden in terms of GDP losses.