Evolution of the competitiveness of the Spanish economy through the real exchange rate between 2016 and 2017
3 de mayo de 2018

The current evolution of Western economies is marked by an unknown feature: the prolongation of the expansion phase of the economic cycle. For example, in countries such as the United States, it has already lasted ten years, whilst the most frequent extension of the entire economic cycle —that is, the sum of the expansion and recession phases— in the last two centuries has been 11 years. Beyond possible constraints, such as hyper-expansionary monetary policies applied since 2008 worldwide, one of the growth engines is the foreign sector.

Taking into account this scenario, and if the structure of the exchanges of a country with the rest of the world is also considered, there are two elements to be monitored: On the one hand, the financial behavior of different currencies due to fluctuations in the supply and demand of these, and, on the other, the structural variations in the supply and demand of goods and services that enter or exit domestic and foreign markets. The union of these two approaches results in a measure of the competitiveness of a country, both via nominal exchange rate, and via price, when calculating value fluctuations through the relative price index. Thus, countries that share the same currency, such as members of the Eurozone, register variations in their competitiveness through the relative price of their goods and services with respect to those of other members of the same monetary area. This can be represented by the inflation differential between two Eurozone member countries, expressed in terms of harmonized prices according to the methodology of Eurostat.

Analyzing these two scenarios, it can be seen to what extent a country or a group of them have gained or lost real competitiveness between 2016 and 2017 with respect to three of the main commercial superpowers globally: the United States, China and Germany. This indicates the trend of foreign trade and, especially, whether or not a country can sustain in the medium term the competitive advantages that it has accumulated since the 2008 crisis. Among the different countries studied, this report focuses on those who are currently members of the OECD and which are also Eurozone member states. It particularly focuses on the case of Spain, which, today, maintains a strong surplus —around 2 percent of GDP. However, to what extent can this surplus be maintained over time and, above all, what is the expected evolution of the deficit in the trade balance of goods if, for example, the oil price rises steadily above 60 USD per barrel?

Evolution of real competitiveness with respect to the United States

Between 2016 and 2017, only six OECD member states have gained real competitiveness over the United States. Although in Sweden and Switzerland there has been virtually no variation in the nominal exchange rate, the rise in prices —which have grown more in the United States than in any these countries— has allowed this real competitiveness increase. In other cases, such as the United Kingdom and Turkey, price behaviour has slowed down the increase in real competitiveness, although it has been much stronger in Turkey (-9.01 percent) than in the United Kingdom (-0.51 percent). Finally, China and Japan have regained some ground against the United States between 2016 and 2017. However, the greatest losses in competitiveness with respect to the real dollar have been those of Iceland, the Czech Republic, Israel and Chile. Thanks to greater austerity in the price index, Israel has halted its competitiveness bleeding caused by the nominal appreciation of its currency against the dollar (-6.28 percent), which damages its exports, especially within the high-tech sector and also agriculture.

While the nominal depreciation of the dollar against the euro has apparently hurt the Eurozone’s foreign sector, it can be seen to what extent the position of strength of European exports has barely receded in 2017. The real exchange rate remains below the nominal exchange rate, which is an indication of undervaluation. Alternative indicators such as the Big Mac Index point to this direction when movements of the exchange rate from euros to dollars are analysed.

Evolution of real competitiveness with respect to China

In this case, there are only three countries that experience improvements in relative competitiveness with respect to China: Turkey, United Kingdom and Japan. Between 2016 and 2017, the Chinese yuan has depreciated with respect to all of its commercial partners in real and effective terms (- 2.17 percent), reversing the loss of competitiveness accumulated since 2013, especially against the dollar, the pound sterling and the main European countries with which it maintains important commercial relations, as it is the case of Germany.

Evolution of real competitiveness with respect to Germany

If the analysis is restricted to the countries of the Eurozone —around two thirds of the exports and imports of the members occur between them—, several differences arise regarding their behavior vis-à-vis the United States and China. The real exchange rate in Germany has appreciated 1.46 percent in relation to the dollar, which means a loss of real competitiveness with respect to the United States. This, however, has been mitigated by the containment of relative US/Germany prices, estimated at 0.39 points. Therefore, as prices rise more in the US than in Germany, the goods of the latter have been relatively cheaper, partly reducing the loss of real competitiveness.

Publicaciones relacionadas