Silvana S.: How long will the economic downturn caused by the COVID-19 crisis last?

The public health policy measures taken to combat the COVID-19 pandemic in Austria and around the world have led to the most severe economic downturn since the end of the World War II.

Austria’s 2020 gross domestic product (GDP) fell by 7.3%

Calculations carried out by the Austrian Institute of Economic Research (WIFO) in December 2020 show that Austria’s 2020 gross domestic product (GDP) fell by 7.3% compared to the year before. Based on current projections, 2021 growth will not be enough to fully offset the 2020 decline. This means that the Austrian economy will not be able to reach precrisis levels again in 2021.    

How long the economic downturn will last depends on a number of factors

How long it will take for the economy to recover or, put the other way around, how long the economic downturn will last depends on a number of factors. The most important of these factors is the public health situation and the future development of COVID-19 incidence rates in Austria and its major trade partners such as Germany, Italy, and the US. If it becomes necessary to impose further lockdown measures, this would impede a potential economic recovery and maybe even worsen the economic situation again. The sooner we are able to stabilize the public health situation, the sooner the economy will be able to recover. Speeding up Austria’s COVID-19 vaccination efforts will be crucial in this context. Other countries, for example Israel and the United Kingdom, have shown how it may be possible to carry out a plan for reopening the economy by achieving widespread immunity in the population.

The (economic-)psychological effects of the crisis and the scope of the structural damage to the economy

Other factors that will codetermine the dynamics of the economic recovery after the crisis include the (economic-)psychological effects of the crisis and the scope of the structural damage to the economy. The first of these factors refers to the question of whether people will change their behavior due to the COVID-19 pandemic and reduce forms of consumption like going out to see a movie, going to see a play at the theater, or eating out. Structural damage to the economy occurs if companies that would otherwise be economically viable and productive drop out of the market due to the COVID-19 crisis, leading to an at least temporary lack of supply compared to demand.

Harald Oberhofer, professor at the Institute for International Economics