Energy and Fiscal Shocks: Reassessing Industrial Competitiveness

Energy price shocks never occur in isolation: their impact is shaped by the broader macroeconomic context, in particular by governments' fiscal stance. This paper investigates how two key forces-energy price shocks and demand stimuli induced by fiscal policy-affect industrial performance in advanced economies, and shows that their effects depend critically on trade exposure. Using sector-level data for 30 countries over the period 1978-2022, we find that rising energy prices reduce manufacturing value added through both cost and demand channels, with more persistent effects in less open sectors. In contrast, demand-led fiscal expansions generate more complex dynamics: while boosting domestic sales, they simultaneously weaken external competitiveness. On average, a 1% increase in domestic demand leads to a 1.8% decline in manufacturing exports within three years. The overall effect on value added depends on the degree of trade openness - it is positive in the short term for sheltered sectors, but turns negative after two years in globally integrated ones.