the study and the cases of Italy and Germany -

the study and the cases of Italy and Germany -

Is there an inflation from too many profits? The question was asked by Allianz Trade, the German credit insurance group which in a European study analyzed the profits of companies, sector by sector, to understand the effects of inflation, since the prices of raw materials and energy are declining, while those of products remain high.

The study shows that with 40.8% of gross value added at the end of 2022, the margins of non-financial companies average +0.6 percentage points above average, with Italy (44.8%) and Spain ranking better than Germany and France. However, there are significant differences between sectors.

Agri-food drives the increases

Profit margins have increased particularly in agribusiness

where retailers were able to increase their margins to 78.6% in the fourth quarter of 2022 (12.3 percentage points higher than the pre-pandemic level). In construction, the profit share stood at 54.4% (9.3 percentage points higher than pre-pandemic levels).

As for the focus on countries, in the manufacturing sector, Spain remains in the best positiongiven its competitiveness and the reforms implemented. In the food industry, the profit margin in France is now well above its pre-pandemic average (at 48.1% in Q1 2023, compared to a pre-pandemic average of 40%) as input costs (including energy) are falling, while industry players are raising their input prices. sale. In Germany, selling prices in many sectors have risen much more than would have been justified from the trend in purchase prices.

Energy prices: the increases in Italy and Germany

Two sectors have contributed massively to supporting aggregate margins since 2021: transportation services and energy.

How did it happen? The study analyzes the German and Italian cases.

In Germany, the high construction order book - both in terms of volume and value - dating back to before the pandemic and the war in Ukraine, was amplified by the increase in prices of building materials and related delivery bottlenecks, while wages remained low.

Inflation, that's why

Buildings in Italy

Likewise, The construction sector in Italy has been able to raise prices thanks to the recovery in demand over the past two years. The tax credit relating to the super bonus measure, introduced to improve the energy efficiency of the housing stock, has pushed up demand but at the same time inflated building-related prices. However, while Allianz Trade researchers expect investments to continue, also supported by Pnrr resources which will keep demand buoyant, they expect a correction in the coming quarters, given that even the generous government support has been redirected by reducing the amount.

In the services sector, on the other hand, corporate margins have been subjected to severe pressurethe. While energy and transport are oligopolistic sectors with strong pricing power in the market, the other services sector, including hospitality, B2B services and telecommunications have struggled, the study highlights, with margins well below the their pre-pandemic averages. Furthermore, these sectors were affected by the acceleration of wages and costs of production factors.

According to the researchers, it has limited the extent to which they can raise their selling prices above input costs, despite the resilience of demand for services. Business surveys in Spain show that expectations about future prices are declining. With not inconsiderable wage increases expected in the four major eurozone economies for at least the next two years to offset last year's real income losses caused by high inflation, pressure on margins will continue.

Inflation, that's why

Because prices (now) could go down

The forecast for 2023? According to Allianz Trade we should be past the peak in inflation driven by corporate earnings. The decade before the pandemic did not allow companies to raise prices in a globalized production regime. Just-in-time strategies have also helped reduce costs. The commodity price shock that followed the pandemic, the energy crisis and supply chain bottlenecks (chips, freight) have given companies in the downstream sectors of the value chains a kind of monopoly to support profit-driven inflation. Several upstream sectors have also gained systemic relevance, such as logistics and road haulage. However, the latest pricing power indicators suggest that some deceleration is taking hold and so are the deflationary thrusts begin to become visible (metals, chemicals, textiles).

Expectations for Italy

Costantino Scozzafava, who Chief commercial officer for the Mediterranean Countries, Middle East and Africa area for Allianz Trade, confident about Italy: The improvement in GDP prospects for 2023, with expected growth of around 1.1%, together with the return of inflation, should have a positive impact on the immediate future, especially if the Italian system is able to increase , as much as possible, productivity and wages. However, the scenario remains uncertain, with companies that will have to face conditions of geopolitical uncertainty and financial markets that are still unstable. We remain confident, as our country's businesses have historically proven to be resilient to negative economic cycles by leveraging the ability to network, innovation and entrepreneurial vision, which have always been distinctive elements of Made in Italy.

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