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Business sector performance.

8.1 Introduction

This chapter presents calculations of production costs, product prices, margins and other components of the gross operating surplus(1) in the business sector. Input consumption is valued, as in the National Accounts, at replacement prices. Profitability is measured as the profit share, that is, the gross operating surplus as a share of value added.

8.2 Summary

The gross operating surplus in the business sector rose appreciably in 1991 because the average increase in variable costs was more than halved (Table 8.1). Input prices and wage costs both rose considerably more slowly than in the preceding years while the average product price continued to rise almost as much as before. The growth of the operating surplus came almost entirely from the production of services, with some fall in the surplus from branches producing goods. The industrial gross surplus and profit share decreased appreciably, while the levels were largely unchanged in construction. The picture of the services sector is somewhat less favourable if one excludes 1 and 2-family houses and leisure dwellings.
Table 8.1 Business sector gross operating surplus
 Billion Change, per cent or
 SEK percentage points
 Current
 prices
 1990 1991 1992 1993 1994
Mining and
 manufacturing
Gross surplus 76.2 -8.3 0.2 10.9 9.7
Profit share(1) 28.4 -1.8 0.8 2.1 0.9
Construction
Gross surplus 22.2 4.7 -18.7 -50.7 -10.3
Profit share 24.7 0.1 -2.5 -8.9 -0.7
Other business
Gross surplus 292.5 11.6 10.8 1.7 1.3
Profit share 50.2 1.4 2.2 0.4 -0.6
All bransches
Gross surplus 390.9 7.4 7.4 0.9 2.5
Profit share 41.6 0.9 2.0 0.5 -0.3
Unassigned items(2)
Banking services -63.6 - - - -
Wage costs -3.3 - - - -
Other 9.6 - - - -
Total business
 sector
Gross surplus 333.6 11.6 7.9 -2.0 1.0
Profit share 37.6 1.7 2.5 0.3 -0.5
Total excl. 1 and
 2-family houses
 and secondary
 dwellings
Gross surplus 241.9 7.8 9.8 -3.1 0.9
Profit share 30.4 0.8 2.6 0.1 -0.5
(1) Gross surplus in per cent of value added at factor prices.
(2) A branschwise breakdown of the business sectors's consumption of banking ser
vices is
not available. The Other item consists mainly of the descrepancy between estimat
ed and
paid indirect taxes.


In 1992 the gross operating surplus is expected to go on rising at total level, while the profit share improves more rapidly than last year. The fall in the industrial surplus is slackening and an increased average profit margin gives an improvement in the profit share. In construction, on the other hand, the gross surplus and the profit share are falling sharply. The combined profit share for the branches producing goods is calculated to rise. Both the gross surplus and the profit margin as well as the profit share are continuing to rise in the services sector. The banks, for instance, need to increase their interest margins to offset substantial credit losses. The gross operating surplus for the banks also benefits from the abolition of the turnover tax on securities at December 1991.

In 1993 the estimates suggest that the total operating surplus will fall, while the profit share is largely unchanged. The prospect of a profit slump in construction and weak profits in the services sectors are mainly responsible for this. Very weak domestic demand will no doubt preclude an appreciable improvement in profit margins in the production of services even though the level of costs is unusually favourable, partly due to the reduction of payroll charges. An improvement is foreseen, on the other hand, for the industrial operating surplus and profit share. This is mainly explained by increased profit margins in basic industries, where world market prices are expected to turn upwards, particularly for forest products. The improvement in industrial profits also comes from the continued fall that is foreseen in variable unit costs. This implies some further overall increase in the average profit margin for branches producing goods.

The estimates for 1994 are highly uncertain and presuppose that wage costs rise 4 per cent in all parts of the business sector. Continued improvements are foreseen for the industrial operating surplus and average profit share, mainly due to persistently favourable prices for forest products. In construction, on the other hand, profits should go on deteriorating. The combined profit share for the branches producing goods is estimated to go on rising. With domestic demand persistently weak, product prices in the services branches will probably not be able to keep pace with rising costs. Variable unit costs are calculated to rise relatively sharply, partly due to slack productivity and an appreciable price rise for inputs. This may lead to some fall in the average profit share for services. The profit share for the total business sector may also fall.

8.3 Mining and manufacturing

Despite only a moderate increase in average costs, industrial margins went on falling last year. Falling prices for petroleum products and other imported inputs helped to limit the rise of industrial consumption costs to 1 per cent. Labour costs, however, went on rising relatively rapidly. Hourly wage costs went up more than 7 per cent, of which one and a half points came from increased payroll charges in connection with the broadening of tax bases. As productivity improved little more than one per cent, unit labour costs rose almost 6 per cent. Total variable costs accordingly went up about 2 1/2 per cent. The price rise for industrial products was less than this, under 2 per cent, and the average gross margin therefore went on falling in 1991 (Table 8.2).
Table 8.2 Variable production costs, product price and margin in mining
and manufacturing
 1991 1992 1993 1994
Unit change, per cent
Consumption costs 1.0 -1.5 -0.2 3.8
Wage costs 5.8 -2.0 -2.2 1.8
 Hourly wage costs(1) 7.1 3.7 0.0 4.0
 Productivity(2) 1.2 5.9 2.3 2.2
Total variable costs-(3) 2.5 -1.7 -0.7 3.2
Product price 1.9 -1.3 0.5 3.6
Gross margin(4) -0.5 0.3 1.1 0.3
(percentage points)
(1) Compensation to employees per man-hour, incl. collective charges and indirec
t noncommodity
taxes.
(2) Gross output at constant prices per man-hour.
(3) With a deduction for non-commodity subsidies and an addition for non-commodi
ty,
wage-independent indirect taxes.
(4) Gross operating surplus as a share of value added.
Sources: Statistics Sweden and the Institute.


With an exceptionally low increase in wage costs and falling input prices, variable costs in mining and manufacturing are expected to fall this year for the first time since 1986. Hourly wage costs are calculated to rise less than 4 per cent, while productivity improves almost 6 per cent, thereby reducing unit wage costs by 2 per cent. Prices for industrial consumption are expected to fall somewhat less than this, so the overall reduction of variable unit costs would stop short of 2 per cent. Product prices are also expected to fall but somewhat less than costs, giving some improvement in profit margins this year.

Forest product prices are expected to fall at much the same rate as last year. Pulp prices are now dropping less rapidly but prices for paper products have turned downwards. Iron ore and metal prices are also falling. Profit margins in basic industries will therefore go on falling but not as markedly as in 1991 because input price reductions and good productivity growth are leading to lower costs. With falling prices for industrial raw materials, consumption prices for manufacturers are calculated to fall about half of one per cent. With an exceptionally low increase in wage costs and strong productivity growth, variable costs are then estimated to fall more than 1 per cent. Producers are expected to use the low costs to lower prices somewhat more than competitors in export markets. Domestic market prices are expected to rise, but only moderately on account of weak demand. The average price increases would then stop at half of one per cent. Even with this price restraint, the very favourable development of costs should lead to a substantial reinforcement of margins (Table 8.3).
Table 8.3 Variable production costs, product price and margin in
manufacturing
 1991 1992 1993 1994
Unit change, per cent
Consumption costs 2.6 -0.4 -0.2 3.5
Wage costs 7.2 -1.6 -1.3 1.5
 Hourly wage costs(1) 7.1 3.7 0.0 4.0
 Productivity(2) 0.0 5.5 1.3 2.5
Total variable costs-(3) 4.2 -1.1 -0.6 2.9
Product price 4.2 0.4 -0.1 2.9
Gross margin(4) 0.1 1.4 0.4 0.0
(percentage points)
(1) Compensation to employees per man-hour, incl. collective charges and indirec
t noncommodity
taxes.
(2) Gross output at constant prices per man-hour.
(3) With a deduction for non-commodity subsidies and an addition for non-commodi
ty,
wage-independent indirect taxes.
(4) Gross operating surplus as a share of value added.
Sources: Statistics Sweden and the Institute.


In 1993 employment is expected to fall less markedly than this year, accompanied by further cuts in production, leading to appreciably weaker productivity gains. Hourly wage costs excluding payroll charges are expected to rise 3 per cent next year and payroll charges are to be cut in accordance with the second "crisis" package. Total hourly wage costs would then be unchanged next year and unit labour costs are calculated to fall almost 1 1/2 per cent. Little change is foreseen in input consumption costs in 1993, partly because the general energy tax is to be abolished for industry. Total variable costs would then go on falling next year. As product prices are expected to rise 1/2 per cent, the gross industrial margin should improve substantially.

The calculated improvement in margins in 1993 comes mainly from an expected upturn for forest product prices after three very weak years. This is accompanied by a further fall in variable costs. Manufacturers are expected to go on exercising price restraint and may even lower export prices, which is calculated to result in an appreciable price improvement relative to foreign competitors. This would still enable producers to go on strengthening their margins next year in export as well as domestic markets.

In 1994 there is the prospect of a further improvement in industrial margins, thereby restoring the operating surplus as a share of value added to the level in 1989 (Diagram 8.1). Unit wage costs are calculated to rise about 2 per cent because productivity growth is expected to be much the same as in 1993 while hourly wage costs rise 4 per cent after no change the year before. Industrial consumption costs are also calculated to rise more appreciably, generating an average increase in total variable costs of just over 3 per cent. Activity in forest industries should go on recovering, while prices in other basic industries are likely to be somewhat more subdued. Manufacturers are assumed to go on raising their prices less than competitors in export markets but the relative improvement is expected to be appreciably smaller than in 1993. Assuming that pricing in the domestic market is also less restrained than in 1993, gross margins would be unchanged in 1994.

8.4 Construction

The decline in construction activity that began in 1990 led to unchanged production and decreased productivity in this sector. With a sharp increase in wage costs, this appreciably weakened the gross margin. In 1991 production went on falling and productivity hardly changed but as the rise of wage costs slackened, the profit margin does not appear to have gone on falling (Table 8.4).
Table 8.4 Variable production costs, product price and margin in building
and construction
 1991 1992 1993 1994
Unit change, per cent
Consumption costs 0.0 -1.0 -2.0 0.0
Wage costs 6.9 -2.6 -2.3 0.7
 Hourly wage costs(1) 6.9 2.7 -0.1 4.0
 Productivity(2) 0.0 5.5 2.2 3.3
Total variable costs(3) 3.2 -1.8 -2.1 0.3
Product price 3.7 -3.5 -7.0 0.0
Gross margin(4) 0.4 -1.5 -4.7 -0.3
(percentage points)
(1) Compensation to employees per man-hour, incl. collective charges and indirec
t noncommodity,
commodity taxes.
(2) Gross output at constant prices per man-hour.
(3) With a deduction for non-commodity subsidies and an addition for non-commodi
ty,
wage-independent indirect taxes.
(4) Gross operating surplus as a share of value added.
Sources: Statistics Sweden and the Institute.


In 1992 production in the construction sector is calculated to fall somewhat more than last year but the number of employees is dropping so sharply that productivity is rising appreciably. With a limited increase in hourly wage costs, unit labour costs are expected to fan and so is the average level of unit consumption costs. Weak demand will probably cause product prices to fall even more, leading to a renewed reduction of the profit margin.

In 1993 our estimates point to a sharp fall in production and a rather modest improvement in productivity. With the reduction of payroll charges, however, there should be little change in hourly wage costs, so that unit labour costs go on falling. Input price reductions are also expected to continue as a result of depressed profit margins in the production of building materials and weak prices for imported inputs. One factor here is increased foreign competition as a result of the EEA agreement. Total variable costs per unit are calculated to fall somewhat more than in 1992. However, as prices for new buildings and construction are expected to fall appreciably more next year, the average profit margin will deteriorate sharply. The gross operating surplus in construction would then have been virtually halved in two years. This is a very serious strain on a branch where many firms already face substantial problems with profitability in another activity, namely real-estate management. This may lead to an appreciable loss of production capacity in the construction industry next year.

As supply contracts, the price fall for new buildings and construction should be checked, followed by a recovery. In 1994 the average product price is assumed to be largely unchanged from 1993. Little change is foreseen in input prices. But as wage costs are expected to rise more than productivity, the profit margin would tend to go on falling.
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Publication:The Swedish Economy
Date:Sep 22, 1992
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