Eurozone corporate profit margins stood at 40.8% of gross value-added by the end of 2022, surpassing the long-term average by 0.6 percentage points. However, a closer look reveals some nuances. Italy and Spain seem to have a stronger position compared to Germany and France, particularly in the manufacturing industry. Nevertheless, when excluding sectors with strong pricing power like transportation services and energy, margins are significantly lower. In fact, in France, they reached their lowest level since the mid-1980s in the first quarter of 2023.
Margins in the consumer services sector still remain well below the pre-pandemic average. Among the European Union countries, France is particularly disadvantaged with margins at 28%, compared to 37% in the EU overall and 45% in Italy. Despite a resilient demand for services, companies in this sector face intense competition, rapid wage increases, and negative productivity growth since the pandemic. These factors limit their ability to raise selling prices above input costs.
German companies demonstrate superior profitability in the agriculture and construction sectors. Construction companies, in particular, have capitalized on the general upward trend in prices, leading to a significant expansion of profits, reaching 53% of gross value added. In comparison, other major European economies like France report a lower percentage, such as 36%.
Corporate profits are expected to have reached their peak due to strong wage pressures and diminishing pricing power. Moreover, there are even deflationary forces affecting industries like metals and chemicals. While producer prices are experiencing a significant deceleration due to lower commodity prices, the normalization of supply chains, and growing deflationary concerns in China, wage growth is projected to remain high at least until early next year. This situation will contribute to squeezing corporate margins. The services sector, however, is an exception as it is expected to delay the decline in service price inflation.