Peripheral Eurozone countries have taken the brunt of the crisis over the last few years, requiring successive bailouts and garnering the derisive nickname PIGS (for Portugal, Italy, Greece and Spain). Spain has managed to keep inflation in line with the rest of Europe and manufacturing profits higher than the periphery, mostly on the back of cheap labor, though Societe Generale analyst Herve Amourda warns that the situation may not last long.

Profit margins improved materially in Spain

“Since 2009 trends in euro area economies have differed significantly from one another, with a severe recession in peripheral countries, generally combined with a sharp decline in ULC [unit labor cost] and an impressive rise in unemployment,” says Amourda. “In France and Italy, the increase in ULC has not passed through to prices, which has squeezed firms’ profits. Meanwhile, profit margins improved materially in Spain (despite the weakness of the economy there) and Germany (despite tensions in the labour market).”

spain

Labor costs growing faster in France and Italy than in Spain

The most recent harmonized index of consumer prices (HICP, a consumer price index used by the European Central Bank) show most countries close to the eurozone average of 1.6 percent year-on-year, with Germany and Spain at 1.9 percent, and France and Italy at 1.2 percent.  Labor costs have varied much more dramatically, growing faster in France and Italy than in Spain and Germany.

“Developments in ULC since the beginning of the crisis are now well-documented and diverge significantly between countries,” says Amourda. On the other hand, “inflation rates grew at a comparable pace across all countries over the same period.” It appears that this discrepancy explains the pressure on French and Italian profit margins, which have acted as a buffer against inflation.

ULC change eurozone

While generally optimistic about German performance, Amourda expects that Italy and France will have to enact serious structural reforms — not just the incremental measures that have been taken so far — if they are going to restore their manufacturing profit margins, but he isn’t bullish on Spain either. “We believe this situation should prove temporary, both in terms of profit and price developments. In particular, the decline in Spanish ULC is probably coming to an end,” he says.