Crafting is not essential, but gives very good benefits. I'll mention some:
-High crafting and blacksmithing can create very powerful weapons that can do about twice the damage of looted and bought ones (I think it's imbalanced).
-It's good to use crafting to create special arrows if you plan to have a ranger in your party.
-Heavy armor + anvil eliminates the movement penalty, considerably improving the performance of STR characters.
