Navigating Shocks: The Performance of the EU Corporate Sector from the Pandemic to the Energy Crisis

The EU corporate sector has been subject to severe shocks in recent years, i.e., the administrative restrictions on activity in the context of the COVID-19 pandemic, the supply bottlenecks in its aftermath, and more recently the spike in energy prices in the context of the full-scale invasion of Ukraine by the Russian Federation. This paper uses the latest available industry- and firm-level data to quantify the impact of the spike in energy prices on cost-price dynamics and corporate profitability of non-financial corporations (NFCs). Firstly, we document price-cost margin developments at the country-industry level by computing production cost indices at quarterly frequency. In this step, input-output tables are used to construct implicit input deflators. Secondly, we plug these price-cost margin developments into the latest available financial statements of the firm to simulate the evolution of profitability over 2022-2023. Thirdly, we characterise the evolution of profitability for publicly listed EU firms, based on their published financial accounts up to 2023. In the first step, we uncover a positive relationship between production cost increases and the energy intensity of the industry, only partly compensated by producer price growth. In the second step, we find that 20% of NFCs had negative cumulative operating profits over 2022-2023. About half of these firms posted positive profits in 2021, underpinning the contribution of partial pass-through to a deterioration of corporate profitability. In the third step, we provide an indirect robustness check of our simulations, by showing that the spike in energy prices had a negative effect on NFC profitability overall. Further, we assess the role of exposure to the shock. We find that profitability growth of energy intensive firms was pushed into negative territory over 2016-2023. This result holds for gross, operating, and net profit margins. Overall, the results suggest that while there has been substantial pass-through of production cost increases to producer prices, dampening the impact on profitability, the spike in energy prices was associated with a deterioration in cost competitiveness. Longer-term challenges remain, particularly for energy-intensive industries, that require more structural solutions.