The business sector began to show recovery in 2021 and during the first three quarters of 2022, with companies reporting advances in invoicing, driven by inflation. Net ordinary income nearly doubled by September, rising about 94.7%, while gross value added grew by around 21.1%. Cost efficiency in assets inched up by 4.2% and had already returned to pre-pandemic levels in many cases.
These figures come from quarterly statistics. The central balance sheet report released by the Bank of Spain on Thursday highlights that, overall, firms did not pass on every rise in energy and generation costs to their customers. Sectors such as purification, electricity generation, trade, and accommodation were less able to transmit higher costs. The statistics also show a slowdown in economic activity, with some firms reporting a downturn in profits during the third quarter.
The report aims to answer two questions within the current inflationary context: How much can production costs be reflected in selling prices, and how is the improvement in gross value added shared between a company’s owners and its employees?
Are costs passed on to prices?
The report introduces the concept of the evolution of the sales margin, defined as gross economic result divided by turnover. This metric helps analyze the degree to which firms are able to transfer higher average production costs to their selling prices.
The overall finding is that most companies did not transfer all increased costs into prices. Real revenue for many firms declined despite rising expenses. This conclusion was voiced by Angel Gavilán, General Manager of the Bank of Spain, Economics and Statistics. Yet the result is not uniform across all sectors. The refinery sector, for example, managed to reflect higher cost inputs more effectively in prices, while the electricity generation sector did not see the same pass-through among marketers. In addition, sectors such as trade and hospitality are noted to be able to pass on energy costs to prices, particularly in the context of strong demand following the lifting of epidemic-related restrictions.
The response varies by sector and even within sectors. In general, less financially stable firms show higher cost pass-through as they raise prices to protect margins, while exporters, who have benefited from larger margins in recent years and bear higher energy and oil costs, tend to absorb more costs and maintain tighter profits. In everyday terms, the trend can be summarized with three phrases: some firms must raise prices to survive; others cannot raise prices without compromising competitiveness; and a few can refrain from price increases thanks to accumulated profits from prior years.
How is the benefit distributed between the company and its workers?
To answer this question, the Bank of Spain uses a second indicator called the gross value added margin. This is calculated as the ratio of gross economic result to gross value added (VAB).
So far in 2022, growth in gross economic result reached 38.5%, with template costs rising 3.6% and average wages climbing 3.2%. Meanwhile, personnel costs increased by 6.9%. This suggests that, in 2022, the distribution of the best company results favored operating profit. Gavilán notes this shift and asks whether it is disproportionate. He answers no, predicting a return to 2019 levels rather than a sustained imbalance.
Understanding central balance sheet statistics
The latest quarterly Central Balance Sheet (CBRT) includes data from 905 companies for the first three quarters of 2022, with submissions received by mid-November. This sample accounts for roughly 12.7% of the gross value added produced by all companies. Within this framework, gross value added is defined as total production value minus intermediate costs, excluding labor costs. When labor costs are not subtracted, the gross economic result (REB) is recorded instead.
In a subsequent step, if financial income is added to the REB and debt interest and depreciation are subtracted, the Net Ordinary Result (RON) is derived. Including extraordinary results and tax payments yields the overall exercise result for the period, the metric used in this survey to describe performance.