The companies form a barrier against the economic misery to come. It is important to keep these dikes strong and if necessary reinforce them.
Spiked energy prices, looming energy shortages, skyrocketing inflation and the West’s economic sanctions against Russia and vice versa have not created a significant imbalance in companies at the moment. Many listed companies present good results for the first six months of the year.
This is in somewhat sharp contrast to the prevailing pessimism about the state of affairs in the economy. But it’s not really strange. Economic growth is less strong than expected after the corona years 2020 and 2021. But the economy is still growing.
High inflation does not encourage families to keep a tight rein on their wallets. By adjusting wages to inflation, they suffer little loss of purchasing power. In Belgium, there is even an increase in household disposable income because jobs are still being created and employment is growing.
In addition, the companies manage reasonably well to transfer the increased costs for energy, raw materials and personnel into their sales prices, so that their profit margin does not suffer too much. And they look for and find ways to reduce costs.
The companies are proving particularly resilient in this challenging economic environment.
“We are achieving our second-best result in a severely disrupted market environment,” said Mathias Miedreich, CEO of materials group Umicore. This also applies to many other companies. They are remarkably resilient. Because they generally went into this crisis in fairly solid financial health – also thanks to the support they received from the government during the corona pandemic. And because they are agile in a challenging economic environment.
This does not mean that things will continue to be this easy in the coming months. The IMF predicts a sharp slowdown in the global economy in 2022 and 2023. These will be lean years. German industry, traditionally an important economic engine for the whole of Europe, risks a partial shutdown if Russia completely shuts off the gas tap.
The interest rate increases planned by the European Central Bank to fight inflation make it more expensive for companies to finance themselves. It will definitely slow down their activities and investments somewhat.
And the wage-price spiral cannot continue indefinitely. At some point, the point is reached where the companies can no longer pass the higher costs onto their sales prices, because they then torpedo their turnover.
The companies have so far proved to be a strong cushion to absorb the shocks of the collective impoverishment – which is high energy prices – for the whole society. But it is dangerous to assume that they can continue to absorb those shocks. At some point, their profitability is jeopardized.
‘Let the companies pay for the crisis’ is a frivolous and dangerous slogan.
When their fenders are flattened, an important wall of defense against the waves of the economic crisis disappears. If companies get into financial difficulties, there is a risk of reduced activity and slower employment growth or even rising unemployment. This in turn leads to lower incomes for households and higher expenses for the public sector. That could set off a downward spiral of even more business closures, higher unemployment and economic decline.
‘Let the companies pay for the crisis’ is a frivolous and dangerous slogan. On the contrary, it must be ensured, even if it costs effort and sacrifices elsewhere, that the dyke against the crisis waves that the companies form remains strong and is reinforced if it threatens to break.