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Monthly Report: Relative energy price rise hurting, euro depreciation supporting Germany’s international price competitiveness

How is Germany’s international price competitiveness faring in light of high energy costs? The Bundesbank’s experts explore this question in the latest edition of the Monthly Report. To this end, they examined the impact of the higher energy costs, on the one hand, and the euro's depreciation against the US dollar, on the other. The result of their analysis: in purely arithmetical terms, the relative rise in energy costs in Germany from the start of the year to September 2022 – a period in which this rise was particularly pronounced – caused Germany’s price competitiveness to deteriorate by 0.9% taking into consideration the energy intensity of production. By contrast, all other things being equal, the euro’s losses against the US dollar would have improved price competitiveness by around 1.9% in this period. This rough calculation illustrates, the Bundesbank experts explain, why common indicators of price competitiveness still show it to be fairly favourable for Germany and virtually unchanged since the end of 2021.

Uncertain supply situation not the main cause of euro depreciation

However, this assessment should be interpreted in macroeconomic terms, they say. “This certainly does not mean that, just because of the euro’s depreciation against the US dollar, the rise in energy prices is unproblematic for all domestic sectors, or enterprises for that matter,” the Bank’s economists stress in the report. Moreover, the depreciation of the euro against the dollar was, they note, not primarily a response to the energy crisis itself but was, in fact, attributable to other circumstances. These include, in particular, the relatively strong tightening of US monetary policy compared with the euro area. The uncertain energy supply situation was therefore not the main reason for the depreciation of the euro. However, if these circumstances prove to be temporary – for example, as a result of a stronger tightening of monetary policy in the euro area compared with the United States – the exchange rate effect that has so far supported price competitiveness would also disappear in the future. Germany’s price competitiveness would therefore deteriorate. According to the Bundesbank’s experts, this would be the case especially if energy costs, which have risen sharply compared with other countries, remain high.

How price competitiveness is influenced

Over the past two years, energy prices have risen sharply worldwide. This was driven mainly by the economic recovery following the pandemic-induced downturn as well as, first and foremost, shortages in Russian gas supplies and Russia’s war of aggression against Ukraine. Compared with other industrial countries, the rise in energy costs has been particularly sharp In Germany in the year to date. Taken in isolation, such a relative increase in costs reduces a country’s price competitiveness. At the same time, the euro has depreciated noticeably against the US dollar in the year to date. In US dollar terms, goods exports from Germany therefore became cheaper and thus more competitive.

Experts use two indicators to determine competitiveness

In order to determine Germany’s price competitiveness, they calculated two indicators in their analysis: one of them compares the current value of a real effective exchange rate with its long-term average. Its development shows, first, that Germany’s price competitiveness can currently still be regarded as fairly favourable by historical standards. Second, as compared with the final quarter of 2021, it has remained virtually unchanged overall despite the (relative) rise in energy prices. This was due to the nominal price developments of the euro, they note. The euro has, they explain, lost around 1.6% in value in trade-weighted terms from Germany’s perspective between the last quarter of 2021 and mid-December 2022. The second indicator is based on what is known as the productivity approach. According to the Bundesbank’s experts, this approach is particularly suitable if price competitiveness is being assessed against a large number of countries, including emerging market economies. This indicator, too, currently suggests that Germany is in a favourable competitive position.