“There are recurring questions on this subject and we don’t have many explanations to offer.” Serge Allegrezza, director of Luxembourg’s statistics bureau Statec, has come across a worrying anomaly: the low profit rate of Luxembourg companies (excluding those in the financial sector).
For years, Luxembourg has lagged behind the rest of the European Union in terms of profitability, measured by the rate (within non-financial-sector businesses) of earnings before interest, taxes, depreciation and amortisation (Ebitda). With a Ebitda rate of 7.2%, the country ranked second-to-last in the EU in 2020, according to the latest available statistics (below), just ahead of France (6.7%) and significantly below the EU average (10.2%).
In practical terms, an Ebitda rate of 7.2% means that these companies on average have just €7.20 leftover, per €100 of income, to pay creditors, taxes and any investments they seek to make.
Low but stable
How should we interpret this? In a memo published in 2018, Statec takes aim at the thermometer: “The Ebitda rate… is not an adequate measure of the profitability of non-financial companies,” it writes, blaming Luxembourg’s poor result on the country’s “particular economic fabric.” The authors refer to “more relevant” profitability indicators like return on assets. The memo also states that Statec is contributing to a database (BACH) with a view to examining the issue in greater depth.
Today, five years later, there is no longer any question of pitting one indicator against another. “You have to look at several,” insists Allegrezza, who is also the director of the Competitiveness Observatory. He observes that international indicators point to a fairly stable situation for Luxembourg. This is supported by OECD data (below), which calculates what proportion of corporate income is allocated to profits.
Investment lagging behind
Profitability is stable, then. Wherever you look, however, it remains low when compared to the amount of capital invested. “It’s mysterious,” admits Allegrezza.
The Statec director can only hypothesise: “Investment is lagging quite markedly. Are companies more fragile? Less well equipped? Or are they satisfied with lower returns?” Whatever the case, the phenomenon seems to be self-perpetuating: “Companies invest on the basis of anticipated profitability. And this is based on past profitability.”
This problem of profitability has already been targeted by the Chamber of Commerce. “We see it in the surveys we regularly carry out among businesses,” says its economic affairs director, Christel Chatelain. “The retail and hospitality sectors are hit particularly hard by these profitability challenges. This is no coincidence: these are labour-intensive sectors, and Luxembourg is one of the countries with the highest labour costs.” The economist adds that the wage indexations--five in a very short timespan--are weighing on the profitability of non-financial-sector companies.
During the elections, the Chamber of Commerce spoke loudly about the importance of this profitability. “People don’t think about it enough, but it’s obvious: a company that isn’t profitable will not survive. Companies need to be able to invest in the future, especially in a context of environmental and digital transition,” says Chatelain. In her view, the competitiveness of the Luxembourg economy is at stake.
“Low profitability is a problem in terms of the country’s attractiveness,” agrees Allegrezza. “Why invest in Luxembourg if the return is low? To optimise tax? That’s an open question.”
Given the stakes involved, Statec says it will look again at the issue. “For us, it’s important to know where we stand and how effective we are,” says the director. “But I have to say, with dismay, that not many people in Luxembourg are interested in the subject. Nobody has asked us to investigate. For the time being, therefore, the statistical institute is spending its time on other targets.”
One of them is related and highly topical: how have rising energy prices and wage indexations affected the profitability of businesses? In particular, to what extent have companies increased their prices? Can we talk about margin inflation in Luxembourg? A Statec report due in December should provide some answers.
This article was originally published in Paperjam. It has been translated and edited for Delano.