Empirical analysis shows that demand forces related to the reopening of the economy, the strong policy support over that period and, more recently, the absorption of the adverse shocks have contributed to the post-pandemic recovery. This article reviews the main developments in economic activity between the beginning of 2020 and the end of 2022. JEL Code E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, DeflationĪbstract Since 2020 the euro area has been hit by a succession of extraordinary adverse shocks: the coronavirus (COVID-19) pandemic, global supply chain strains, Russia’s invasion of Ukraine and the related energy price hike. The box also shows that in an environment characterised by surging intermediate consumption costs, it is possible for unit profits to increase strongly and have an upward effect on inflation while mark-ups and profit margin indicators derived from corporate accounts remain broadly unchanged. This is true for both the broad indicator of unit profits and more narrowly defined profit indicators. This analysis shows that unit profits have grown strongly of late and made a visible contribution to domestic price pressures in the euro area. It also shows how the current signals from unit profits based on national accounts data correspond to those of indicators of mark-ups and profit margins derived from corporate accounts. It analyses the contribution made by unit profits using a broad profit indicator based on gross operating surplus and mixed income, as well as more narrowly defined profit indicators derived from the national accounts (which are closer to business profits). JEL Code E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements J31 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Wage Level and Structure, Wage DifferentialsĪbstract This box looks at how unit profits have contributed to the recent strengthening of euro area domestic price pressures, using national accounts data up to the first quarter of 2023. Several euro area countries with legacy external imbalances have improved their price competitiveness in recent years when compared with the pre-pandemic period, while others have recorded considerable losses in price competitiveness. In such cases, inflation differentials may cause significant shifts in price competitiveness that need to be addressed by structural policies and/or countercyclical fiscal policy. However, in other cases, inflation differentials may reflect persistent diverging cost developments, possibly related to a spillover of energy and/or food price shocks into labour cost differentials, or structural challenges such as nominal and real rigidities in product and labour markets. To a certain extent, inflation differentials are normal in a currency union, insofar as they reflect temporary adjustments to shocks or are associated with catching-up processes. Abstract The box provides an analysis of the recent increase in inflation differentials in the euro area countries and its impact on price competitiveness.
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