Ι ‘ve focused on inflation in recent posts so I would like to make a few points on export price inflation dynamics in the periphery. Since the idea of reduction in unit labor costs rests on the assumption that lower costs will be reflected on export prices and through price elasticitiy (which is usually below 1) to export growth, it is reasonable to check certain metrics:
- The magnitude of export price inflation in periphery countries compared to Germany and
- How export prices move compared to import prices. A reduction of ULC (other things equal) will allow for higher firm profit margins and lower export prices, even if import prices increase (depending on value added). If on the other hand other firm costs increase (taxes on production/income, access and cost of credit, energy costs), the margin will be lower and export prices will follow import prices closely.
I ‘ve used the Ameco database goods imports and exports deflator series for Germany and the periphery. The latter excludes Ireland which is a rather special case since it is an export hub for large multinational corporations:
It is clear that Greece is an outlier, with export prices increasing over 21% in the 2010-2012 period. while it is also the only country where net export price inflation was positive which is probably a result of other costs on production. The rest of the periphery (with the exception of Portugal) displays a rather normal increase in export prices (the Euro area increase in the 2010-2012 period was 9.4%) with Germany still managing to keep its export inflation at very low levels.
Net changes are highly negative for the rest of the periphery which means that any reductions in labor and other costs are passed through to prices, despite any increase in import prices (the analysis would be more clear if value added of exports was easily available).
A simple linear trend shows that there is strong positive correlation (coefficient of 1.07) between net export prices and the final export price inflation. The fact that Greece, despite having the largest fall in ULC, is the only country with a positive net increase in export prices suggests that other factors (my guess is access to credit) play a major role in firm costs and do not allow them to not pass through any import price increases. In terms of export price inflation, Greek internal devaluation seems to be quite far from success so far.
What is even more alarming is the fact that during the same period (2010-2012), the private consumption expenditure deflator for Greece increased 8.6% and the domestic demand excluding stocks 3.4%. It seems that exports had price dynamics of their own.