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Analysis of company profitability in Cyprus: the case of the unit profit metric

Marios Polemidiotis (mariospolemidiotis@centralbank.cy)
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Marios Polemidiotis: Central Bank of Cyprus

No 2024-1, Working Papers from Central Bank of Cyprus

Abstract: The aim of this paper is twofold: (a) to present an analysis of company profitability trends in Cyprus, focusing on post-pandemic developments, both at the aggregate and at the sectoral levels; and (b) to shed some light on whether companies in Cyprus put up prices post-pandemic beyond the surge in input costs, via the construction of a corporate pricing power proxy. The paper uses data from the income side of National Accounts to construct the unit profit metric, modified by excluding mixed income and capital depreciation. The aggregate and sectoral metrics are defined as the net operating surplus of the economy/sector in question divided by real GDP/sectoral GVA. The estimates at the aggregate level point to a surge in unit profits following the outbreak of the pandemic, reaching historically high levels in 2022, however in a context of strong pent-up demand pressures following the lifting of the COVID lockdowns. At the sectoral level, the rise in unit profits post pandemic was mainly driven by trade, tourism and leisure-related activities, coinciding with strong economic reopening effects. The corporate pricing power proxy was at an all-time high in 2022, coinciding with strong domestic demand, suggesting that companies raised prices beyond the strong corporate cost dynamics. Going forward, past high company profitability appears to allow firms to absorb any further cost pressures, including from the wage side, given the observed, albeit relatively contained thus far, drop in total economy unit profits, also coinciding with an ongoing unwinding of strong demand pressures. At the same time, the sectoral estimates of unit profits exhibit significant variation, with continued, albeit much more moderate, growth in services. Thus, possibly higher and/or more persistent than foreseen company profits in some sectors could pose an upside risk to the baseline inflation outlook.

Keywords: profits; wages; corporate pricing power; economic reopening effects; pentup demand (search for similar items in EconPapers)
JEL-codes: D49 L11 L16 L21 L25 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2024-04
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