Economcis 10/04/2010: Ireland's Competitiveness - not improving

Often overlooked today (in the usual media focus on credit flows), Ireland's Harmonized Competitiveness Indicators, published by the Central Bank are painting a really troubling picture.

The latest data, released this week in the CB's quarterly update shows that despite all the talk about wages, our competitiveness has not been improving at any significant rate during the current crisis.

Charts below illustrate:
First, the monthly figures above. It is clear that consumer price deflation acts as the only force that is inducing gains in competitiveness in Ireland. Even by this measure, improvements are not dramatic - over the course of the crisis so far, Ireland Inc has managed to improve its competitiveness only to the levels of August 2007! In other words - if 2007 was the year this economy was running on a toxic mixture of drugs and steroids, according to the CB figures, we are still reliant on the same toxic potion of uncompetitive prices and costs, except we are no longer capable of running at all.

Adjusted by unit labour costs, our competitiveness performance is even worse. We are, factoring out the seasonal effects, still in the economy geared to the boom.

The second chart shows quarterly changes:
This is really self-explanatory. Ireland Inc is absolutely out of touch, in economic terms, with its previous, competitive self. Having endured 4 years of unsustainable bubble (2004-2007), we are now lingering at close to the bottom of our historical competitiveness position.

Economics 18/03/2010: Services Inflation in Ireland

CSO released an interesting set of new stats on price inflation in select services. Per experimental Services Producer Price Index (SPPI) average prices charged by domestic service producers to other businesses in Quarter 4 2009, were on average 4.1% lower in the year when compared with the same period last year.

The most notable changes in the year were:

• Architecture, Engineering and Technical Testing (-9.7%),
  
• Computer Programming and Consultancy (-8.5%),
• Advertising, Media Representation and Market Research (-7.2%),
  
• Freight and Removal by Road (-5.2%) and Air Transport (+6.3%).
  

Services Prices increased by 0.4% in the quarter. This compares to a decrease of 2.3% recorded in Q3 2009.

The most significant quarterly price decreases were in

• Freight and Removal by Road (-2.2%),
  
• Postal and Courier (-1.4%) and
  
• Sea and Coastal Transport (-1.4%).
  

There was an increase of 4.8% in Air Transport.

Now, what CSO report did not show is the following. While deflation in higher value added, human capital-intensive services was rather significant, mid-range value-added services saw much more moderate deflation, with low value added labour-intensive sectors such as security services holding up almost unchanged over time. Chart below illustrates:
For all the talk about improved competitiveness, transport-related services costs are still on the upward trend:
And this is before Carbon Taxes kicked in.

Another interesting point to be made here is that the first chart above appears to suggest that deflation is almost not happening at the level of sectors that are labour intensive - industries most impacted by the minimum wage. In more wage-flexible sectors, where human capital drives value added to much higher levels, inflation is running negative. This has two implications going forward, should this trend persist:

1. Despite all the talk about the 'poor' bearing the brunt of the crisis, at least as far as prices charged for services indicate so far, there is most likely stronger deflation of wages at the higher end of wages distribution;
2. While competitiveness of our traded and higher value added services is increasing, competitiveness of our domestic services (anchored in higher labour intensities) is not improving significantly.
   

Economics 24/02/2010: Ireland and EU16 Competitiveness

Charts below show our relative competitiveness, as measured by the harmonized competitiveness index (HCI) based on consumer prices (CPI) and reported by the ECB.

Charts 1-3:

Despite massive deflation, compared to the rest of Euro area, Irish economy has managed to record only a small improvement in HCI (CPI) of 1.57%, while the Euro area recorded an improvement of 2.22%.

Charts 4 and 5 show the latest data for harmonized competitiveness indicator based on GDP deflator.

Charts 4-5


Once again we are not in a very good club, folks. And another worrying thing – we are not at the competitiveness gains game anymore either. Table below illustrates

Figure 6

After Q1 2009, we stopped gaining in quarterly change in competitiveness and instead moved into positive territory – signaling deterioration in competitiveness. Net positive – we did so at a slower pace than the Euro area as a whole. But does this help much, when you consider that we are the third sickest economy by this measure in EU16 after Luxembourg and Spain?

So, ok, may be labour costs adjusted for productivity help us in our quest for competitiveness. After all, we do have pharma and medical devices sector here that is performing miracles when it comes to transfer pricing-backed growth in output per worker? And the two sectors weathered the storm of the crisis pretty well so far.

Charts below illustrate:

Figures 7-8
Not really. Harmonized competitiveness index based on unit labour costs also shows us to be the weakest point in the Euro-land chain. And it also shows that in Q3 we have gone into reverse when it comes to gaining competitiveness. We are now pulling away (once again) from the Euro area average.

All of this is instructive – for all the robust talk about Ireland gaining in competitiveness, restoring our advantageous relative position compared to EU counterparts, real data shows we are now getting economically-speaking sicker, not healthier… Time to start thinking about changing our policies, anyone?