Fall In Unit Profits Helps GDP Deflator Moderate In Q1

The Italian GDP deflator moderated to 2.48% Y/Y (vs 3.91% prior) in Q1, as a sharp pullback in unit profits absorbed a rise in unit labour costs.

• Unit labour costs rose 1.5% Q/Q (vs 1.1% prior) and 4.1% Y/Y (vs 2.8% prior), thus contributing 1.61pp to annual GDP deflator growth in Q1.
• On an annual and quarterly basis, compensation per employee grew at a faster rate than in Q4 ’23. On the other hand, hours worked grew at a slower pace than last quarter (and is still below the pre-covid trend), while real productivity growth remained negative. These dynamics pushed up unit labour costs in Q1.
• However, unit profits fell 1.3% Q/Q and 0.4% Y/Y, contributing -0.18pp to GDP deflator growth overall.
• Reduced firm pricing power likely drove the pullback in unit profits, and this theme is still evident in recent data. The May manufacturing PMI noted that firms reduced output charges in spite of rising input costs in order to become “more price competitive and encourage sales”.
• The dynamics of the GDP deflator are consistent with those seen in Spain: unit labour cost rises are buffered by falls in unit profits, helping the overall GDP deflator moderate.
• The ECB is also expecting to see a similar development in the Eurozone-wide national accounts data on Friday.