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Industrial operating surplus.

8.1 Introduction

This chapter presents calculations of production costs, product prices, margins and other components of the industrial operating surplus.(1) Input consumption is valued, as in the National Accounts, at replacement prices. Profitability is measured by relating the operating surplus to the stock of fixed capital; this measure is reported only for some large industrial aggregates. The branchwise development of profitability is considered in terms of the operating surplus as a share of value added. Changes in these two measures coincide if the capital ratio is constant, that is, if the capital stock changes at the same rate as value added.

8.2 Summary

Industrial profitability rose strongly in the period 1981 -- 84 after the devaluations in 1981 and 1982 (Diagram 8.1). After that, profitability fell in basic industries but the average level for manufactured products remained very high until 1986. The subsequent fall in this sector was accompanied by a renewed improvement in profitability in basic industries; the latter came from greatly increased profits in forest industries, with a peak in 1989.

In 1990 profitability fell sharply in basic industries as well as in manufacturing. World market prices and demand for basic products, primarily pulp and metals, was very weak. This was accompanied by a fall in both domestic and export demand for manufactured products, with downward pressure on prices and profit margins here. Swedish manufacturers held the average increase in export prices to the same rate as foreign competitors and halved the average relative price rise in the domestic market to 2 1/2 per cent. Production was cut back and total industrial productivity remained very weak (Table 8.1). Productivity in basic industries developed somewhat more favourably because employment fell sharply. At total level the hourly industrial wage rose more than 10 per cent; with weak productivity this meant that unit labour costs went up as much as 10 per cent. Variable unit costs rose 5 1/2 per cent.
 1990 1991 1992
Unit change, per cent
Consumption costs 3.9 1.3 2.4
Wage costs 9.9 8.0 2.9
 Hourly wage costs(1) 10.6 7.6 5.0
 Productivity(2) 0.6 -0.4 2.0
Total variable costs(3) 5.6 3.4 2.5
Product price 3.7 1.8 3.1
Margin -1.8 -1.5 0.6
(1)Compensation to employees per man-hour, incl. collective charges and indirect
non-commodity taxes.
(2)Gross output at constant prices per man-hour.
(3)With a deduction for non-commodity subsidies.
Sources: Statistics Sweden and the Institute.

In 1991 industrial profitability is still falling and the level is expected to be much the same as in 1981.(1) Average profitability for manufactured products is calculated to be even weaker than the low in 1978, while the level in basic industries is much the same as when activity peaked in 1980.

Industrial costs are expected to rise less rapidly this year than last. The average level of input prices is estimated to go up 1 1/2 per cent compared with almost 4 per cent in 1990, while little change is foreseen in petroleum prices, after strong increases in the two previous years. Import prices are still falling for metals and prices are also weak for imported manufactured inputs and for domestic services. Wage costs, on the other hand, are calculated to go on rising appreciably this year, by about 7 1/2 per cent, while productivity remains weak. Unit labour costs are then calculated to go up 8 per cent, while the overall increase in variable unit costs stops at 3 1/2 per cent.

Industrial profit margins are still falling as a result of the drop in world market prices for basic products and growing competition for manufactured products. We assume that producers of manufactured products raise the average export price about as much as foreign competitors, while the increase in the relative domestic price is much the same as last year.

The estimates for 1992 indicate that the decline of industrial profitability will slacken, with some improvement in margins. This tendency is foreseen for basic industries as well as manufacturing. The forecast assumes an exceptionally low increase in costs and also an upturn in prices for basic products.

Hourly wage costs are assumed to rise 5 per cent in all branches of mining and manufacturing in accordance with the Rehnberg Commission's stabilization agreement. As overall industrial productivity is estimated to rise 2 per cent, the increase in unit labour costs would stop at less than 3 per cent. The average price of inputs is expected to rise less than 2 1/2 per cent and the increase in variable unit costs would then be somewhat higher than this.

By raising prices less than competitors, producers of manufactured exports are expected to improve their competitiveness. Domestic price increases are also likely to be limited by persistently weak demand and consequently will not exceed the price rise for manufactured imports to the same extent as in earlier years. Between them these price increases would make it possible to raise the profit margin by approximately one half of a percentage point.

8.3 Basic industries

After two very favourable years, product prices for basic industries(1) hardly changed in 1990 (Table 8.2). Prices fell substantially for pulp and somewhat less for metals but the level went on rising for sawn wood products and for iron ore. The loss of profitability was checked in that unit costs rose considerably less than in 1989. The average price of input consumption rose moderately in forest industries and was unchanged in other basic industries. Wage costs, however, went on rising relatively rapidly but this was offset by an appreciable increase in productivity as a result of sharp cuts in employment.
 1990 1991 1992
Unit change, per cent
Consumption costs 2.1 -2.4 1.5
Wage costs 6.0 7.0 2.3
 Hourly wage costs(1) 10.6 7.8 5.1
 Productivity(2) 4.4 0.8 2.7
Total variable costs(3) 2.9 -0.5 1.7
Product price -0.2 -4.9 2.5
Margin -3.0 -4.4 0.8
Profit share(4)
Total basic industries 33.5 19.6 21.9
 Forest products 41.6 26.0 29.0
 Other industrial materials 19.8 9.5 9.9
(1)Compensation to employees per man-hour, incl. collective charges and indirect
non-commodity taxes.
(2)Gross output at constant prices per man-hour.
(3)With a deduction for non-commodity subsidies.
(4)Gross operating surplus as a share of value added.
Sources: Statistics Sweden and the Institute.

In 1991 profitability in basic industries is expected to go on weakening at a faster rate than last year. The decline is particularly marked for forest industries, where pulp prices are still falling sharply. Prices for paper products are expected to be much the same as in 1990 but sawmills, where profits were good last year, are now facing marked price reductions. A substantial increase in unit wage costs, due to weak productivity, is also accentuating the decline of profitability in forest industries. Profits in other basic industries are also expected to go on falling this year. Some price rise is foreseen for iron ore but prices are still falling for other minerals and metals.

In 1992 product prices for forest industries are expected to rise slightly, while variable costs are largely unchanged, giving a modest increase in the profit margin. In other basic industries the profit level is estimated to be much the same as this year.

8.4 Manufacturing

Production costs for manufactured goods(1) rose strongly in 1990 (Table 8.4). Unit labour costs moved up as much as 11 per cent because average hourly wage costs rose sharply while productivity remained very weak. However, the average price rise for input consumption was clearly smaller than the year before (Table 8.3); price increases for petroleum products were still high but this was more than offset by a swing to a steep price fall for imported metals. The rise of variable unit costs averaged approximately 7 per cent for the third year in succession.
 1990 1991 1992
Unit change, per cent
Consumption costs 4.8 2.5 3.0
Wage costs 11.3 9.1 2.8
 Hourly wage costs(1) 10.7 7.6 5.0
 Productivity(2) -0.5 -1.4 2.2
Total variable costs(3) 7.0 4.9 2.9
Product price 4.8 3.8 3.4
Margin -2.1 -1.0 0.5
Profit shares(4)
Total manufacturing 19.5 16.8 17.8
 Engineering excl. shipyards 15.3 12.5 13.4
 Other manufactures (excl.
 petroleum and food industries) 25.7 23.3 24.4
(1)Compensation to employees per man-hour, incl. collective charges and indirect
non-commodity taxes.
(2)Gross output at constant prices per man-hour.
(3)With a deduction for non-commodity subsidies.
(4)Gross operating surplus as a share of value added.
Sources: Statistics Sweden and the Institute.

Instead of passing on the increased costs in full in product prices, producers lowered the average profit margin in domestic and, above all, export markets; the relative export price was held at an unchanged level and the relative rise in the domestic market was halved to 2 1/2 per cent.

The clearly lower rise of wage costs in competitor countries in recent years has accentuated price competition for Swedish products, particularly in export markets. Since 1986 the average profit margin for Swedish manufactured products has been lowered 4 percentage points.

For engineering, the marked price fall for metals and weak prices for other imported inputs was favourable for costs. However, unit costs were pushed up by a substantial loss of productivity and large hourly wage increases, giving a very rapid rise in unit labour costs. Some improvement in productivity was noted for other manufactured products but in the chemical industry in particular this was offset by the sharp price rise for petroleum inputs. The profit margin was accordingly reduced to much the same extent in these two sub-sectors. The profit margin in the petroleum industry, as calculated for the National Accounts, tended to rise because product prices rose somewhat more than the price of crude oil. The profit margin also rose in the food industry.

In 1991 variable production costs are rising somewhat less than last year as a result of the marked recession, which began in 1989 and seems to be accelerating this year, together with weaker world market input prices, for instance. The average price rise for input consumption is expected to be more or less halved from 1990 to 1991. Little change is expected in petroleum prices, while prices for imported metals go on falling. Import prices for manufactured inputs and the price of domestic services are also expected to be weak. With rising unemployment and weak industrial profitability, moreover, the rise of industrial wage costs is being checked. Hourly wage costs are estimated to go up approximately 7 1/2 per cent. But as productivity is falling for manufactured goods, the increase in unit labour costs still amounts to as much as 9 per cent. The average increase in variable unit costs is calculated to be approximately 5 per cent. This year it seems that producers are continuing to raise their prices by less than the increase in costs. In the case of manufactured products, the average export price appears to be rising about as much as the prices of foreign competitors, accompanied by a fairly moderate increase in the relative domestic price. The combined result is a further fairly considerable fall in the average profit margin.

The lowering of margins this year again seems to be roughly the same for engineering products as for other manufactured goods. The margin for petroleum products is likely to grow because product prices are tending to rise even though the price of crude oil is falling. Little change is foreseen in the margin for food products.

Profitability in manufacturing is calculated to fall this year to a very weak level, even below the earlier record from 1978. The outlook is clearly worst for engineering, where profitability has fallen continuously since the mid 1980s.

In 1992 industrial costs are expected to rise remarkably slowly. An increase of about 3 per cent is foreseen for average variable costs in manufacturing. The rise of hourly wage costs is expected to stop at 5 per cent. With some growth of demand and increased production, moreover, productivity should turn upwards. Unit labour costs are then estimated to rise no more than 3 per cent. Moderate price increases are also expected for most inputs next year.

This modest increase in industrial costs gives producers some opportunity of improving competitiveness and raising capacity utilization. But there is also a need to raise profit margins in order to improve profitability.

In order to improve competitiveness, producers of manufactured goods are expected to raise export prices by an average of one percentage point less than competitors and domestic market prices by little more than one point more than competitors. It is many years since competitiveness in the domestic market weakened as little as this. The overall weakening of competitiveness over a series of years would then be checked in 1992, with the possibility of some improvement in export markets. The exceptionally low increase in costs does not permit a more appreciable reinforcement of competitiveness for manufactured products because profitability is exceedingly low, particularly in engineering. Producers are expected to raise their average profit margin by approximately half of one percentage point. The decline of profitability in manufacturing would then be checked and turned into some improvement. Little change is foreseen in profit margins for food products and petroleum products. [Diagram 8.1 Omitted] [Tabular Data 8.3 Omitted]
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Title Annotation:Sweden
Publication:The Swedish Economy
Date:Sep 22, 1991
Previous Article:Investment.
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