The war in Ukraine is weighing on the economy and pushing up costs for firms, although the rise in sales prices appears more limited

Direct exposure to Ukraine and Russia via sales and supplies remains low for Belgian firms. Despite this, the war in Ukraine and the sanctions targeting Russia have heavily impacted their activities, whether this is through an explosion in input costs or the intensification of supply problems. The negative impact varies widely from sector to sector: sectors which depend more on energy inputs (the transport and logistics and aviation sectors and industry in general) or food products (accommodation and food services, the food industry and food retailing) are more exposed. However, as yet, firms do not appear to be reflecting the rise in input costs fully in their sales prices. This is apparent from a new survey of Belgian firms conducted by the NBB and a number of business federations. The various headwinds they face are undeniably having a negative impact on activity and investment plans. Half of the firms polled expect this to continue in the medium term and to last for more than one year.

Between 28 and 30 March 2022, a number of federations of businesses and self-employed people (BECI, SNI, UCM, UNIZO, UWE and VOKA) conducted an ad hoc survey of Belgian firms. The initiative is coordinated by the NBB and the Belgian business federation, the FEB, and aims to measure the views of firms in the current economic climate, particularly the difficulties facing firms and self-employed people in the context of the war in Ukraine[1]. In terms of methodology, the approach was similar to that of the surveys conducted from March 2020 to October 2021 in the context of the COVID-19 crisis. The questionnaire is different and has been adapted to the current situation and concerns. A total of 2 415 firms and self-employed people took part in this survey. In view of the high level of uncertainty inherent in the current situation and the subjective nature of the survey data, the results presented should be interpreted with a certain degree of caution.

Belgian firms have relatively little direct exposure to Ukraine and Russia

The war in Ukraine has led to a drastic reduction in trade with Ukraine and Russia, particularly due to the economic and financial sanctions imposed on the latter by a group of Western nations. The firms polled state that, on average, 0.7 % of their sales and 1.6 % of their supplies were directly linked to Ukraine or Russia before the start of the war. Although, overall, direct exposure is limited, this varies considerably depending on the sector. The manufacturing sector (particularly the chemical and pharmaceutical industry and the food industry) and the transport and logistics sector seem to have above-average exposure to trade with these two countries, in terms of both sales and supplies. The agriculture sector also has a high direct exposure, largely in terms of supplies. However, other sectors, such as support services, have lower direct exposure.

Whether in terms of sales or supplies, direct exposure increases with the size of the firm. For example, 30 % of firms with over 50 employees sold to one of the two countries (as against 6 % of firms with under 50 employees) and 34 % sourced supplies from them (as against 12 % of firms with under 50 employees). Nevertheless, for most of the firms polled, supplies and, above all, sales, amount to less than 5 % of the total. Incidentally, the regional dimension does not appear to lead to significant differences in terms of direct exposure.

After easing in the months leading up to the war, supply problems have again intensified considerably

The robust recovery after the COVID-19 crisis led to supply problems which impacted the activity of Belgian firms, a point highlighted by a similar survey conducted in October 2021. In drawing parallels between the latter and the current survey, it is noticeable that between the end of 2021 and the start of the war in Ukraine, a marked improvement was observed in relation to bottlenecks in supply chains. However, the war in Ukraine halted this incipient upturn. The proportion of respondents reporting encountering “moderate” or “severe” supply problems rose again sharply. While all sectors report intensified supply problems, these are more marked in certain sectors whose activity depends more extensively on supplies such as construction, manufacturing, commerce, agriculture and accommodation and food services. For instance, supplies of nearly two thirds of firms involved in manufacturing, wholesale and construction were moderately or severely disrupted in March. The same applies to more than half of those in non-food retailing and around a third of those in agriculture, food retailing and accommodation and food services. In these last seven sectors, this proportion has grown since the start of the war in Ukraine, by between 6 and 23 percentage points. Other factors, such as the new strict anti-Covid measures in China, may well also play a role in exacerbating supply problems. Nevertheless, this suggests that, due to the international interdependence of production chains, the negative economic impact of the war and sanctions is far greater than the figures for direct trade exposure to Ukraine and Russia would imply.

Input costs have exploded for firms, largely due to rising energy prices

Supply problems and trade barriers are restricting the supply of goods and services and causing inflationary pressure, as already highlighted by the monthly price trend statistics. Here, firms polled whose activity depends on inputs (i.e. energy, intermediate products, raw materials, transport, packaging) saw their input costs rise sharply, or even very sharply over the last six months. For almost a third of firms polled whose activity depends on inputs, the rise is between 0 and 20 %, while, for a further third, it is between 20 and 50 % and, for the remaining third, it is even greater at over 50 %. Although rising input costs leave no sector untouched, broadly speaking, the most impacted sectors rely either on energy products (agriculture, the transport and logistics sector) or food products (accommodation and food services, retail sales (food) or the food industry). In fact, only 5 % of them report no increase in input costs over the last six months.

Given that energy prices have exploded in recent months, the variation between firms is largely attributable to the proportion of energy in their inputs. The firms polled whose activity depends on inputs state that, on average, energy represents 11 % of their input costs (excluding labour costs) in normal times. However, for one respondent in ten, the proportion of energy is greater than 20 %, and these firms, which are more exposed to a sharp increase in energy prices, obviously face a greater rise in input costs overall.

According to the firms polled, the difficulties facing them today – rising input and labour costs and supply problems – are leading to a reduction in production and provision of services of 7 % on average. The negative impact on production and the provision of services is at least comparable to that observed in the survey conducted in October 2021, although it should be noted that certain sectors are experiencing a stronger impact currently (for example industry and the transport and logistics sector).

Automatic indexation increases labour costs considerably, and 31 % of smaller firms and 49 % of larger firms view this as an obstacle to production or the provision of services

As part of the survey, respondents were asked to list the main problems disrupting production or the provision of services. For all respondents, high energy prices were the most frequently mentioned impediment (45 % of respondents). The high level of uncertainty (35 %), the high price of intermediate goods and raw materials (35 %) and supply problems (34 %) are also frequently mentioned. The high cost of labour represents a major problem for 31 % of smaller firms (1 to 10 employees), 41 % of medium-sized firms (10 to 50 employees) and 49 % of larger firms (over 50 employees). On the other hand, low demand (23 %) and high cost of services (13 %) are mentioned less. Finally, only 14 % of firms polled state that they are experiencing no impediment to carrying out their activity.

Thus, beside rising input costs, firms also have to deal with an increase in labour costs, mainly associated with the automatic wage indexation mechanism. Indeed, firms polled with employees report an average increase in labour costs of 5 % compared to the prevailing situation six months previously. This assessment remains roughly uniform regardless of the size of the firm or the industry in which they operate.

The government has extended the temporary lay-off scheme initiated during the COVID-19 crisis for several months. According to the firms polled, less than 1 % of employment in the private sector remains under the temporary lay-off scheme, a comparable rate to that observed in October 2021. No sharp increase has been recorded in sectors which are more exposed to the direct and indirect consequences of the war in Ukraine.

Firms are not yet reflecting the entire rise in input costs in their sales prices

When faced with soaring costs, a firm may choose to reflect this (fully or in part) in its sales prices, but this is not automatic and also depends on the expected impact on sales volume and the length of current contracts. In fact, nearly all firms polled whose activity depends on inputs increased their sales prices in the last six months. However, over three quarters of them report that their sales prices have increased at a slower rate than their input costs over the last six months. For many of these firms, there is a fairly large gap between the rise in their input costs and the increase in their sales prices. This suggests that, over the recent period, some firms have absorbed a large part of the increase in input costs without passing all of it on to their customers for now. Furthermore, in a sectoral analysis, the correlation between the increase observed in input prices and that in sales prices, although positive, appears to be relatively weak overall.

It should be borne in mind that input costs are not the only category of costs for firms (for example, there are also administrative costs, labour costs and depreciation costs). This makes it difficult to assess the average impact on the margins of Belgian firms based on the survey data. Besides, adjusting sales prices can be a laborious and time-consuming process (menu costs), and sales prices may remain rather sticky in the short term. Thus, larger-scale transmission may materialise in future. In view of this, respondents’ intentions regarding the fixing of sales prices in the next six months were also polled. The answers to this question do not lend themselves to unequivocal interpretation and are clearly linked to opinions about the development of the war. Nevertheless, they suggest that the increase in sales prices is not accelerating further.

The negative economic impact does not appear to be limited to the short term

As far as the outlook is concerned, the majority of firms experiencing a negative impact (direct or indirect) do not foresee an end to the negative consequences associated with the conflict any time soon. Barely 16 % of respondents think that the negative impact will be felt for under six months. On the other hand, according to 25 % of respondents, it will last for between six months and one year, while 36 % of them believe that it will last for between one and two years. According to 23 % of respondents, it will be felt for as long as two years. The degree of concern about the current state of the firm’s commercial activity, measured on a scale ranging from 1 (not very concerned) to 10 (very concerned), has soared and is now approaching the levels reached during the first few months of the COVID-19 crisis, regardless of the size of the firm.

The firms polled state that investment plans for the next two years will be cut back by 12 % on average, due to supply problems and increasing input and labour costs. In addition, they expect their production or provision of services to fall by 2 % in the next year. It is noticeable that the size of firm seems to be a factor here: larger firms predict an increase in their production or provision of services in the next year. Regarding the risk of bankruptcy, the firms polled do not appear to be overly concerned as 96.4 % of them do not anticipate bankruptcy in the short term, a comparable level to that found in recent surveys conducted in the context of the COVID-19 crisis. This means that a wave of bankruptcies is unlikely at this stage.

[1]    As no sampling took place ahead of this survey, the survey is based on the assessments of those firms which decided to take part. However, the results are corrected so as to offer as faithful a representation as possible of the composition of Belgian firms’ value added. It should be noted that public administration and defence services, education services and human health services are not included in the results.