companies cannot raise salaries in the face of rapid price increases

Tõnu Mertsina, Chief Economist at Swedbank.A photo: Liis Treimann

According to Tõnu Mertsin, chief economist at Swedbank, companies cannot raise salaries in the face of rapidly rising prices, as this will create a so-called wage-price spiral.

Sales revenue in the corporate sector in the second quarter rose by 33% at current prices, about the same pace as in the first quarter. Wholesale trade, manufacturing and energy production accounted for almost 60% of sales growth in the business sector.

The strong growth in sales revenue was mainly due to the rapid growth in prices, while in volume terms, or at constant prices, there was a slowdown in sales revenue growth. Since cost growth was slightly lower than sales revenue growth, the companies were able to increase overall profits.

In the second quarter, labor costs rose 18% year-over-year, significantly less than the growth in sales revenue of enterprises. The growth in labor costs was lower than the growth in sales revenue since the beginning of last year, which also led to a decrease in the share of labor costs in sales revenue. However, this does not mean that there is much room for companies to increase their labor costs, as their other expenses have been outpacing sales revenue growth for some time now.

Companies could not accelerate the rise in labor costs even if the hourly productivity of their labor force grew faster than labor costs. This is due to the fact that the overall productivity of the business sector is falling both this year and last. Raising wages in the face of rapidly rising prices would create a so-called wage-price spiral, which could make rapid price increases more permanent, which in turn could worsen the competitiveness of Estonian exports.

The gap between growth in corporate sales revenue and growth in total spending has narrowed this year, suggesting that if this trend continues, corporate profits in the sector could start to decline. Declining demand and high energy prices are hitting hard on the profitability of companies. At the same time, the impact of skyrocketing energy costs varies greatly across sectors of the economy. The quarterly figures described above should be considered in the context of the fact that they are preliminary and may be changed later, when adjusting more accurate annual statistics for enterprises.


Source: https://www.dv.ee/ by www.dv.ee.

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