Risks may also be underestimated as a consequence of the so-called “financial accelerator” mechanism, whereby over-optimism about future returns may boost asset valuations and thus firms’ net worth, which then feeds back into higher investment and credit demand and a further increase in asset prices. So much for the theory: what should be our concern in the specific circumstances of the new Member States?
It is possible that part of the story is the difficulty of measuring output in some service industries. Even so, last year's ‘Shifting the Dial’ report by the Productivity Commission highlighted some of the steps we could take to boost productivity in the delivery of services.