Price competitiveness deteriorates sharply in December

An indication of the pressures on Ireland’s competitiveness is provided by the Harmonised Competitiveness Index, the December figure for which has recently been released on the Central Bank website. While the real HCI had been falling gradually since the early part of the last year (a rise in the indicator implies a disimprovement in competitiveness, while a fall in the indicator indicates an improvement), the December figure jumped upwards by 4.0% over the previous month, largely due to the appreciation of the euro particularly against sterling. The Dec 2008 value of 126 puts us back where we were at the beginning of last year.

The nominal HCI isolates the effect on competitiveness of exchange rate movements and takes a weighted average of the bilateral exchange rates with 56 important trading partners. The consumer price deflated HCI (real HCI) can be interpreted as a real effective exchange rate, and takes into account changes in domestic price inflation relative to price changes in the 56 most important trading partners, along with exchange rate developments.

The NCC Annual Competitiveness Report 2008 has a graph (Figure 3.25) showing the trend in the real HCI since January 2000. From that date until September 2008, it noted that Ireland had experienced a 32 percent loss (the revised CB data now suggest 30 percent) in international price competitiveness, reflecting a combination of an appreciation of the euro against the currencies of many of our trading partners and higher price inflation in Ireland.

Putting the December Irish figure in comparative perspective, as is done on the ECB website here, paints a grim picture. The Irish 4.0% increase in December is by far the largest loss of competitiveness of any Eurozone member that month. The 23.8% loss of competitiveness since December 1998 compares to Spain’s 15.5% loss and France’s 1.9%.

2 replies on “Price competitiveness deteriorates sharply in December”

does sth of Ireland’s very high non Euro market abt 40% with the UK i think skew this figure

How are we to react to drastic drops in competitiveness when they are out of our control.

Jeremy, yes, the high proportion of Ireland’s trade with non-euro countries whose currencies have been depreciating against the euro is the main factor explaining the deterioration in relative price competitiveness last month. In fact, the price level here dropped by over 1% in December alone compared to November, whereas it only dropped by 0.1% in the euro area overall, so it is the euro revaluation which is responsible for Ireland’s poor performance on the HCI.

Unfortunately, the consequences of a loss in price competitiveness make no allowance for whether the loss is driven by internal or external circumstances. The solution remains the same – as long as we are part of the euro zone, competitivness can only be restored either by slower relative growth in nominal wages or faster relative growth in productivity.

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