Due to disruptions in global supply chains and higher energy prices, firms have been faced with sharp cost hikes over the last three years. Overall, corporates appear to have weathered these challenges showing recent profit margins increasing to historic highs. Higher profit margins helped reduce firms’ financial vulnerabilities by strengthening their balance sheets and eventually supporting financial stability. But they simultaneously contributed to the rise in inflation.
Looking ahead, a steady normalisation of margins is expected. However, if a wage-price spiral emerges – where wage increases trigger price hikes which, in turn, instigate further wage increases and so on – vulnerabilities could rise, eventually leading to a double negative effect of falling profit margins and slower economic activity. This scenario would amplify financial stability risks.(...)
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