Corporate profit margins : recent developments in a context of low inflation

This article presents an analysis of Belgian corporate profitability and its contribution to the low inflation environment in recent times. Since the 2008-2009 crisis the profit margins of Belgian firms have exhibited a marked decline which has been widespread, affecting industry as well as market services. The profitability of large firms has been eroded more significantly than that of SMEs, but it had improved more strongly before the crisis. The movement in the profit margin of firms in Belgium has been no different from that evident in neighbouring countries. It is mainly cyclical factors that explain the fall in profit margins since the crisis, whereas those margins had risen considerably during the pre-crisis period. In industry, the adverse trend in relative prices is putting structural pressure on profit margins in a context of ever fiercer global competition in manufactured goods. However, the steady rise in real labour productivity – clearly outpacing real wage growth – makes it possible to maintain a reasonable margin. Firms in market services, which are less exposed to international competition, are suffering from very inadequate productivity growth, while until recently their labour costs were still rising quite steeply. For firms active in this branch, it is essentially their ability to charge high selling prices that enables them to preserve a comfortable profit margin. Ultimately, other factors such as the development of e-commerce, may also influence profit margins in the service sector. Margin growth appears to be closely correlated with economic activity. The link between margins and prices is less clear, as margins are apparently utilised as a buffer to dampen the effects of business cycle fluctuations on wage costs and productivity. Margins thus blunt the impact of economic shocks on prices. A comparison with a selection of other euro area countries shows that this impact was felt in the neighbouring countries, but the effect was absent or much smaller in some more peripheral countries.