A first approximation of the firm-level relationship between profit margins and business investment in the Spanish economy

Abstract

Rationale Business investment and profit margins both declined in 2020, but have been recovering since. Statistical analysis of firm-level data can be used to estimate the relationship between these two variables in the Spanish economy in recent years. Takeaways •After a decline in 2020, profit margins in Spain have been rising. This increase has been concentrated among firms that had lower profit margins in 2019. Conversely, firms that had higher margins before the pandemic have, overall, seen profit margins follow a downward trajectory. •The relationship between profit margins and business investment, calculated drawing on granular firm-level data, takes the form of an inverted-U curve: it is positive for profit margins below a certain threshold, but turns negative above that threshold. •In the Spanish economy, most firms stand in the section of the curve where the profit margin-investment relationship is positive. Firms in the section where the relationship is negative tend to be smaller, younger and more productive.