How rising costs have affected industry
The inflationary episode currently being experienced by the Spanish economy is due to a major shock in costs. While the focus has been on the rise in prices for energy and agricultural commodities, since mid-2021 a large number of key raw materials and intermediate goods used in a wide range of production processes have also become considerably more expensive. This article shows how the higher price of these products has affected manufacturers’ operating costs, forcing them to pass on part of this increase to their customers so as not to jeopardise their economic viability.
Traditionally, manufacturing is the most exposed sector in the current context of rising intermediate costs. According to National Accounts data, the value of intermediate consumption in the manufacturing industry in 2019 was equivalent to 75% of its income.10 In other words, out of every 100 euros of turnover, companies in this sector use 75 euros to buy the intermediate products they need in order to function.
In addition, the increase in prices faced by the industry since mid-2021 has been exceptional. According to data from the Industrial Import Price Index, import prices for energy products doubled compared to 2019. Looking beyond energy, the price of non-energy intermediate goods imports grew by a not inconsiderable 28% compared to 2019.
- 10. In the services sector, this value is 38% and in the primary sector, 45%, well below the figure for manufacturing.
Industrial import price index
In short, the industry had to navigate a particularly adverse scenario in 2022. To assess the impact of more expensive intermediate goods on the sector, we used the sales database of large companies and SMEs of the Spanish Tax Authority (AEAT), which provides information on real and nominal income, intermediate consumption and employee remuneration.11,12
According to these AEAT data, expenditure on intermediate consumption in the manufacturing industry in 2022 was 25.4% higher than in 2019. This was caused by an increase in domestic purchases (+26.9% compared to 2019), outpacing the growth seen in imports (+22.2%). This was probably due to two factors: (i) a substitution effect as a result of the increase in price of imported products, which would have encouraged manufacturers to look for domestic alternatives at more moderate prices, thereby boosting the volume of domestic purchases, and (ii) the impact of higher import prices on the increase in price of domestic intermediate products.
- 11. Apart from these data, the National Statistics Institute uses a range of sources to calculate the National Accounts statistics.
- 12. For our analysis of the manufacturing industry, we have excluded the branch of Manufacture of coke and refined petroleum products because the income recorded is lower than expenses (purchases and employee remuneration) in 11 of the 13 years of the available historical series, suggesting that the variables in this branch are not entirely comparable.comparables.
Faced with such appreciable increases in intermediate consumption, the industry has had to adopt a strategy of increasing its sale prices to offset, on the income side and at least in part, the pressure caused by costs. This is precisely what the data reveal. Between 2019 and 2022, manufacturing income grew by 21.3% thanks to sale prices increasing by 19.8%, and this price increase took place without overly damaging sales volume, which was 1.2% above the level for 2019. Needless to say, in a hypothetical scenario in which prices had not increased so much, the growth in sales volume would have presumably been considerably higher.
Trends in intermediate consumption and in the operating income of manufacturing industry since 2019*
To properly analyse the implications of the current cost environment on manufacturing, it’s important to calculate the effect of the changes in costs and income in relation to the sector’s gross profits.13
As can be seen in the next chart, the gross profit of the manufacturing industry as a whole was slightly above its 2019 level, specifically by 1.5% (0.6 EUR billion higher). Although this is a modest increase, given the context of rising costs it’s a positive sign that the industry has managed to sustain its level of profit. The large increase observed in domestic purchases and imports pushed up costs by 89.7 billion EUR. In addition, employee remuneration in the sector rose by 3.4 billion EUR due to a 7.2% increase in the mean remuneration per employee between 2019 and 2022, while the number of jobs remained virtually unchanged (+0.2%).
- 13. We have estimated the sector’s gross profit as total sales minus intermediate consumption and labour costs.
Spain’s industrial sector was able to mitigate cost rises and sustain its level of profit, to the detriment of competitiveness.
Thanks to the pricing strategy outlined previously, the sector managed to mitigate the higher costs (purchases and wages), which rose by 93.1 billion EUR compared to 2019. Specifically, income grew 0.6 billion EUR more than expenditure, mainly because the higher sale prices helped to boost income by 88.5 billion EUR while the higher sales volume generated 5.2 billion EUR.
All in all, in a situation in which cumulative inflation since 2019 has been 11.4%, the growth in profit achieved by the manufacturing industry as a whole over the same period (barely 1.5%) has deteriorated considerably in real terms.
Contribution to the growth in manufacturing’s gross profit since 2019
Finally, in order to assess the sector’s economic health, we analysed the industry’s business margins. Using AEAT data, we can calculate the ratio of gross profit over operating income (similar to the gross margin), which reflects the proportion of total industry income that is transformed into profit.
As shown in the chart below, the gross margin of the manufacturing industry shrank considerably in 2022, despite the sector raising its sale prices considerably (+19.8% since 2019). Specifically, this stood at 8.0%, 1.6 pp lower than in 2019, which in relative terms implies a drop of 16.3%, the lowest since data have been available (since 2010). This drop is due to the fact that the proportion of income allocated to purchasing intermediate goods increased considerably (rising to 82.9%, 2.7 p. p. more than in 2019).
The gross margin of manufacturing industry
All in all, the gross margin of manufacturing industry fell considerably in 2022, with the higher costs being shared among buyers, employees and shareholders.
Our analysis shows that the substantial price increase undertaken by the industry has managed to contain the sector’s slump in margins, although it has fallen far short of fully offsetting the impact of rising costs. It’s also evident that the impact of this sharp increase in costs has been spread among buyers, through a substantial rise in sale prices; employees, through the fall in real wages paid in the industry, and shareholders, through the decline in company profit measured in real terms.