Wednesday, March 19, 2014

19/3/2014: Competitiveness might have improved... but It has little to do with trade...


In light of today's data on trade in goods (January - see next post for details on this), there has been a lot of claims flying around, including one Ministerial press release extolling the virtues of our 'improved competitiveness' as the driver of growth in exports.

So that improved competitiveness, then... Here are the charts showing Irish Harmonised Competitiveness Indicator based on unit labour costs which are designed to capture relative competitiveness in the euro area economies.

Lower values imply higher competitiveness.


Chart above shows two things:

  1. Our competitiveness did improve since the peak in HCI at Q2 2008, but it has deteriorated again in 2013 as the HCI rose from the crisis period low in Q4 2012.
  2. Our competitiveness is still lagging that of the Euro area average (black line). We would have to decrease HCI by some 10% more to hit Euro area average, which is about 3 years worth of further wages and costs austerity, if we are to get there.
But forget the average and look at all euro area countries:


As chart above shows, we are smack in the middle of the euro area distribution. In fact in 2012-2013 we consistently ranked 10th from the top in terms of competitiveness, which is an improvement on 13-134h from the top in 2010-2011, 16th in 2007-2009 etc, etc... Still, we are 10th... which is not exactly a dreamy place to be in, right?..

Here's our distance to the best performer index reading (again, higher values = worse performance in competitiveness terms):


So two things worth noting:
  1. As I noted earlier, things improved, but the improvement is not that spectacular and we seemed to have lost the momentum there.
  2. More importantly, there seems to be only weak correlation between the overall competitiveness changes and exports performance...
To see the above point (2), here is a chart:


As above shows, there is statistically no correlation between improving competitiveness (negative values on horizontal axis) and growth in exports of services. There is some statistical link between improved competitiveness and growth in exports of goods (as blue line indicates). But that link is not particularly strong. And this effect is driven by a handful of 'extreme' events such as dot.com bubble of 1999-2000 and the bursting of the property bubble in 2008. Absent these, the explanatory power of HCI changes drops from 26.7% to 14% and the slope of the relationship becomes as flat as that for the services exports.

In other words, sorry Minister, competitiveness gains might be all good and positive (I think they are), but these hardly explain much in terms of our exports performance.
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