Austria’s Competitiveness Has Improved Significantly

In document Monetary Policy & the Economy (Page 82-86)

dustry, as do capital costs and the prices of imported crude materials.10 Moreover, high labor costs do not dampen the international competi-tiveness of an economy as long as they are compensated by productivity ad-vantages.

Against this backdrop, it makes sense to use unit labor costs – rather than labor costs – as a deflator. Unit labor costs reflect not only changes in labor costs but also changes in labor productivity, as they are calculated by dividing the (hourly) compensation per employee by the (hourly) real value added per person employed in the manufacturing industry. As such, they are a key determinant of manu-factured goods prices and thus a key indicator of the short-term competi-tiveness of an economy. Yet unit labor costs also create methodological problems for a number of reasons:

First, labor productivity grows in boom phases but drops during eco-nomic downturns11; in other words, labor productivity is sensitive to the cycle.12 Second, the transition from labor-intensive to capital-intensive production methods reduces the meaningfulness of the cost competi-tiveness indicator. If labor productiv-ity grows because capital was substi-tuted for labor and if declining unit labor costs go hand in hand with ris-ing capital unit costs, the cost petitiveness indicator overstates

com-petitiveness gains. A third method-ological problem consists in the fact that productivity growth as such is endogenous and that strong produc-tivity gains need not necessarily im-ply an improvement in competitive-ness, but may also imply existing competitiveness problems.13

3 Austria’s Competitiveness

Revised and New Competitiveness Indicators for Austria Reflect Improvement Trend since EMU Accession

integration process and the fall of the Iron Curtain. The productivity rises were bolstered by a contraction in employment (especially through early retirement) and by the outsourcing of services. Austria’s manufacturing in-dustry boomed above all in the sec-ond half of the 1990s, reporting aver-age annual growth rates of 5.4%

(Guger, 2006). Since early 2000 pro-ductivity growth rates have, however, slowed markedly.

Given only moderate wage pres-sures, manufacturing unit labor costs thus sank by 3.5% per annum on av-erage in the second half of the 1990s.14 As a consequence of the compara-tively low productivity growth since early 2000, the decline in unit labor costs has also slowed down since. In the current decade the annual average decline totaled only 1.9%, adding up to –9.3% until the end of 2005. This compares with euro area average in-creases of 1.2% per annum and 6.2%

on a cumulative basis. Within the euro area, unit labor costs were pushed up above all by Italy (+3.1%

per annum and +16.6% cumula-tively), Spain (+1.8% per annum and +9.5% cumulatively), Greece (+3.2%

per annum and +17.1% cumulatively) and the Netherlands (+1.7% per annum and +8.9% cumulatively). In contrast, Germany, Austria’s biggest trading partner, reported a strong de-cline of –1.3% per annum and –6.5%

on a cumulative basis.15 Poland (–4.9% per annum and –22.1% cu-mulatively), Sweden (–1.0% per an-num and –5.1% cumulatively) and Ja-pan (–2.2% per annum and –10.7%

cumulatively) also recorded favorable

unit labor cost developments, as mea-sured in national currencies. Among the countries that joined the EU in 2004, especially Hungary reported comparatively high annual (+3.3%) and cumulative (+17.5%) unit labor cost growth rates. Switzerland, fi-nally, also suffered competitiveness losses through a marked rise in unit labor costs.

Measured by the cost competi-tiveness indicator, the international competitiveness of Austrian manufac-turers’ exports improved by about 15% between the beginning of 1999 and the end of 2005. This improve-ment can be fully ascribed to the more favorable development of unit labor costs in Austria than in its trad-ing partner countries, whereas on balance the influence of exchange rate changes was insignificant over this period. However, a breakdown shows that short intervals within this period did show exchange rate ef-fects. Domestic exporters benefited from the low exchange rate of the euro above all from early 1999 to end-2000, but they lost those ex-change rate advantages between the beginning of 2001 and the end of 2005.

Austria’s manufacturing industry posted the biggest gains in cost com-petitiveness from early 1999 to early 2002 and from mid-2003 to the fall of 2004. While about 40% of the cost-based gains during the first phase can be traced to favorable exchange rate changes, cost-based gains were virtually fully attributable to sinking unit labor costs during the second phase. Between 2003 and 2004,

14 See Guger (2006).

15 The single currency has made productivity and wage differences among individual euro area countries much more transparent. In terms of wage policies, EMU poses problems above all for those countries that have rigid wage-setting mechanisms.

Austrian manufacturers reported a productivity gain of close to 7% cou-pled with extremely moderate wage growth (about 2% nominal wage growth according to the negotiated standard wage rate index for the man-ufacturing sector). By comparison, the losses in cost competitiveness recorded from 2002 to mid-2003 broadly reflected exchange rate changes, whereas the losses suffered since the second half of 2004 are ba-sically the result of unit labor cost in-creases.

Initially, i.e. between early 1999 and early 2002, the price competi-tiveness index (relating to exports of manufactured goods) mirrors the trend of the cost competitiveness in-dex, but in a less pronounced man-ner. The price competitiveness gains in this period totaled about 8%, about half of which were attributable to ex-change rate gains.

In the second quarter of 2003, however, the two real effective indi-ces started to display divergent trends.

Using the HICP/CPI as a deflator, the price competitiveness indicator shows neither the marked gains up to the

second half of 2004 nor the subse-quent losses revealed by the cost com-petitiveness indicator. To some ex-tent, this may be explained by the fact that the HICP/CPI was broadly driven by oil price developments in 2004 and 2005 and that the favorable unit labor cost developments in the manu-facturing industry do not show up in this calculation. However, the diver-gence between the two indicators since the second quarter of 2003 also reflects the different weighting struc-tures used, which put the nominal effective exchange rate indices under-lying the two indices on diverging paths. From the beginning of 1999 to the end of 2000, the two nominal ef-fective exchange rates moved broadly in sync, given the low euro exchange rate. The subsequent strong deprecia-tion of the Japanese yen and the U.S.

dollar against the euro dampened both the price and the cost competi-tiveness of Austrian manufacturing exports. Yet the comparatively faster increase since early 2001 of the nom-inal effective exchange rate index un-derlying the price competitiveness in-dicator can be largely ascribed to the

Chart 3

Development of Austria’s Price and Cost Competitiveness since 1999

105 100 95 90 85 80

1st quarter 1999 = 100

Source: OeNB/WIFO.

Cost competitiveness (deflator: unit labor costs): unit labor costs): Price competitiveness (deflator: HICP/CPI): HICP/CPI):

1999 2000 2001 2002 2003 2004 2005 2006

Manufactured goods exports

Revised and New Competitiveness Indicators for Austria Reflect Improvement Trend since EMU Accession

euro’s exchange rate changes against the currencies of the EU candidate countries (i.e. Bulgaria,16 Romania,16 Croatia and Turkey), Asian countries (excluding Japan) and “other coun-tries.” Indeed, since the end of 2000, the euro has appreciated by as much as 85% in nominal terms against the currencies of the EU candidate coun-tries, which have a combined weight of 2%, while the euro appreciated by about 40% against the other two country groups in the same period.

The contributions to growth reveal that from early 1999 to mid-2006, Austrian manufacturing exporters outperformed above all their compet-itors from the Russian Federation, Hungary and the Czech Republic, but also from Italy, Spain, Poland, Slova-kia and Turkey in terms of price com-petitiveness. At the same time, Aus-trian exporters suffered price com-petitiveness losses especially vis-à-vis Japan and the U.S.A. as well as against Germany, the United Kingdom and Canada. Within the euro area, gains

and losses generally resulted from di-vergent price developments, whereas both price and exchange rate changes played a role in cross-border trade beyond the euro area. Austria’s com-petitiveness losses against the U.S.A., for instance, reflect the depreciation of the U.S. dollar against the euro rather than price developments, which were more moderate in Aus-tria than in the U.S.A. AusAus-tria’s losses against Japan, in contrast, were due to both exchange rate changes and price developments. Conversely, Aus-tria’s competitiveness gains against Poland, the Czech Republic and Slo-vakia also reflect both exchange rate and price developments. Hungary is a case in point for divergent price de-velopments alone driving Austrian manufacturing exporters’ gains in price competitiveness. The weaken-ing currencies of Turkey and the Rus-sian Federation, finally, could only partly offset extremely strong price increases.

Chart 4

Development of Nominal Effective Exchange Rate Indices for Austria

106 105 102 100 98 96 94

1st quarter 1999 = 100

Source: OeNB/WIFO.

Cost competitiveness Price competitiveness

1999 2000 2001 2002 2003 2004 2005 2006

Manufactured goods exports

16 Bulgaria and Romania joined the EU on January 1, 2007.

4 Austria’s Competitiveness

In document Monetary Policy & the Economy (Page 82-86)