In our previous note, we discussed whether businesses or consumers will take the hit from higher tariffs? Who absorbs the tariff-related price increase will depend on various factors, including the nature of the product and company pricing power, but the aggregate ‘space’ available with corporates is noteworthy.
After the onset of the pandemic, the share of corporate profits in economic output has risen sharply, while that of net interest payments, proprietors’ income and employee compensation has eased. The corporates’ share is now the highest in at least the last 25 years.
The question is whether corporates in aggregate can repeat higher profits seen during the pandemic. However, price levels are now elevated after a high-inflation experience, and growth is widely expected to slow (direct and indirect tariff impact), with associated impact on labor markets. Excess savings from the pandemic have been drawn down and wealth effect from asset prices could be challenged.
Incremental fiscal stimulus is unlikely to be heavy like the pandemic response, given already elevated deficit and concerns around government debt. Any monetary policy support for firms will likely be different from that during the pandemic. Consumption demand could therefore slow, and consumers become more price sensitive. Thus, the economic context today, and the likely nature of fiscal and monetary policy support, are very different from that during the pandemic.
Source for the chart: CEIC, Bandhan MF Research
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