Price and non-price competitiveness puzzle in the euro area Pavlos - PowerPoint PPT Presentation

Price and non-price competitiveness puzzle in the euro area Pavlos Karadeloglou European Central Bank Project LINK meeting New York October, 2012

Outline 1. Competitiveness in euro area and euro area countries: developments since 1999. 2. Price competitiveness losses are reflected in worsening of exports and the CA developments. 3. Is it only price and cost competitiveness? 4. Concluding remarks. 2

Outline 1. Competitiveness in euro area and euro area countries: developments since 1999. 2. Price competitiveness losses are reflected in worsening of exports and the CA developments. 3. Is it only price and cost competitiveness? 4. Concluding remarks 3

Recently, the euro area has partially regained lost price competitiveness Nominal and real effective exchange of the euro, relative export prices (Indexed to the 1995-2012 average=100, quarterly data) Source: ECB. Note: The last observations refer to 2012Q3 for NEER-20, REER-20 (CPI) and 2012Q2 for REER-20 (ULTC) and relative export prices . Relative export prices are extra-euro area export prices divided by competitors’ export prices. A decrease indicates a loss in price competitiveness. 4

Over 1999 the divergencies at a country level are significant Developments in HCIs (ULCT-based, Including intra- and extra-trade; percentage change between 1999Q1 and 2012Q2) Source: ECB. Note: For the Euro area the REER-20 is used. A negative value indicates an increase in price or cost competitiveness. The HCIs are constructed using the same methodology and data sources that are used for the euro EERs. 5

Germany seems to be the best performer among the big countries Developments in HCIs (ULCT-based, 1999 =100) Source: ECB. Note: Latest observation refers to 2012Q2. A negative value indicates an increase in price or cost competitiveness. 6

Outline 1. Competitiveness in euro area and euro area countries: developments since 1999. 2. Price competitiveness losses are reflected in worsening of exports and the CA developments. 3. Is it only price and cost competitiveness? 4. Concluding remarks. 7

Current account divergences reflect competitiveness developments Current account 2011 (% of GDP, annual data) Source: ECB. Note: Latest observation refers to 2011. A current account surplus increases a country's net foreign assets by the corresponding amount and a current account deficit does the reverse. 8

Recently, the euro area worsening of export market shares came to a halt, owing to a stabilisation in price competitiveness through 2009 Export market shares Relative export prices (index: 2000 = 100; annual data) (index: 1999 = 100; annual data) Source: IMF DOTS. Source: AMECO. Note: Export market shares are measured as total exports of goods Note: Price deflator exports of goods and services (foreign trade weighted (extra) divided by world exports. Latest observation refers to 2011. relative performance). A decrease means an improvement in price competitiveness . Latest observation refers to 2011. 9

At the euro area country level, export performance varies significantly… Export market shares of selected euro area countries (intra + extra) (index, 2000 = 100, annual data, seasonally adjusted) Source: IMF DOTS and Bank of Greece. Note: Export market shares are measured as total exports of goods (intra + extra) divided by world exports. Lastest observation refers to 2011. 10

…partly reflecting differences in price competitiveness Relative export prices of selected euro area countries (index, 1999 =100, annual data, seasonally adjusted) Source: AMECO. Note: Price deflator exports of goods and services (foreign trade weighted relative performance). A decrease means an improvement in price competitiveness . Latest observation refers to 2011. 11

Export performance relative to foreign demand: significant divergencies Largest euro area countries EU/IMF programme countries (in percentage points) (in percentage points) Source: ECB. Source: ECB. Note: Latest observation refers to 2011. Note: Latest observation refers to 2011. 12

Revealed comparative advantage Revealed comparative advantage in intermediate goods (imports) (annual data) Source: ECB staff calculations. Note: A revealed comparative advantage larger than 1 indicates that a country is relatively more integrated in global value chains. Latest observation refers to 2011, except for SPAIN (2010). 13 13

Revealed comparative advantage Revealed comparative advantage in intermediate goods (exports) (annual data) Source: ECB staff calculations. Note: A revealed comparative advantage larger than 1 indicates that a country is relatively more integrated in global value chains. Latest observation refers to 2011, except for SPAIN (2010). . 14 14

Extensive margins Extensive margin (products and partners) (annual data) Source: ECB staff calculations. Note: The extensive margin is the count of the number of trade relations of a country: the product margin is the number of sectors in which a country exports. The partner margin is the numbers of countries to which a country exports. Each line in the chart shows the total number of partner-product combinations in each country’s exports, it mean to measure a country’s export diversification, in terms of both destinations and sectors. Latest observation refers to 2010. 15 15

Outline 1. Competitiveness in euro area and euro area countries: developments since 1999. 2. Price competitiveness losses are reflected in worsening of exports and the CA developments. 3. Is it only price and cost competitiveness? 4. Concluding remarks. 16

Is it only price competitiveness? • The divergence in trade performances across countries can not solely be attributed to price and cost developments. • We look for a metric for non-price factors driving trade balance • Try to disentangle the respective roles of price and non-price factors to analyse trade balance developments. 17

Methodology • We follow Aiginger (1997) to decompose trade balance into the parts driven by price and non-price factors. NON PRICE FACTORS : Quality, product reputation and variety, availability and reliability of supplementary services and consumer preferences, efficiency of sales networks, unique placement in the global value chain geographic orientation, etc. 18

Methodology • Our major contribution – tackle the aggregation bias – complete decomposition of trade balance (natural resource endowments, services, price and non-price, re- exports and re-imports) • Data – United Nation’s COMTRADE HS-6 sectoral level (5000 sectors ) – 61 economies over the period 1993-2010 19

Competitiveness Regimes Lower Relative Export UV Higher Relative Export UV (UVX i < UVX world ) (UVX i > UVX world ) Price ‐ driven Non ‐ price ‐ driven competitiveness competitiveness Trade Share Price + Non ‐ price + Structural Deficit Price competitiveness deficit Trade Share Non ‐ price ‐ Price ‐ 20

Trade Balance Decomposition Euro Area aggregate Note: Latest observation refers to 2010. 21

Trade Balance Decomposition Greece Note: Latest observation refers to 2010. 22

Trade Balance Decomposition Germany Note: Latest observation refers to 2010. 23

Trade Balance Decomposition Euro Area countries 2010 24

Trade Balance Decomposition United States Note: Latest observation refers to 2010. 25

Trade Balance Decomposition China Note: Latest observation refers to 2010. 26

Caveats for this approach • Not using individual product data � products in a sector are not completely homogenous. • The database only contains data for goods (but service trade can be very important). • Not all countries report all trade at the 6-digit level ( � cannot decompose all the trade balance: have residual “unclassifiable”). • Cannot distinguish purely demand-driven developments from quantity competitiveness: – E.g. a cyclical collapse in domestic demand that leads to a strong reduction of imports across all goods could be picked up as an improvement in price and/or non-price competitiveness. – This could be relevant e.g. for Spain, where the strong fall in imports has been an important driver of the trade deficit reduction. 27

Conclusion • The euro area has lost export market share due to loss of both price and non-price competitiveness. • Significant divergences between euro area countries reflecting differences in price competitiveness. • Not only exports market shares declined but we observe also divergences in export performance relative to foreign demand. • Non-prices competitiveness play an important role and the decomposition of trade balance into its price/non price components is essential for tailor-made rebalancing policies. 28

Thank you for your attention! 29

Trade Balance Decomposition Germany Net Non ‐ Price Net Price Net Exports of Energy Food and Raw Materials TB/GDP 10% 8% 6% 4% 2% 0% ‐ 2% ‐ 4% 30

Trade Balance Decomposition Italy Net Non ‐ Price Net Price Net Exports of Energy Food and Raw Materials TB/GDP 5% 3% 1% ‐ 1% ‐ 3% ‐ 5% 31

Trade Balance Decomposition Spain Net Non ‐ Price Net Price Net Exports of Energy Food and Raw Materials TB/GDP 0% ‐ 2% ‐ 4% ‐ 6% ‐ 8% ‐ 10% 32

Trade Balance Decomposition Greece 33