British Companies See Record Profits

Companies outside the financial sector hit a new peak in profits in the second quarter, with a 15.7% net rate of return

The profitability of UK corporates, excluding the financial sector, accelerated to a record high in the second quarter of 2007, the Office for National Statistics said yesterday.

Economists said the figures suggested that while credit market volatility would in due course raise the cost of funding everyday business and longer-term investment plans, British companies seem better placed than most to withstand such pressures.

Pre-credit crunch, the net rate of return for non-financial companies jumped to 15.7 per cent in the three months to June, up from 15.1 per cent in the three months to March. The rate of return on capital employed for manufacturing firms rose to 8.4 per cent from 5.6 per cent, the ONS said. Service companies' net rate of return picked up to an all-time high of 21.4 per cent from 21.2 per cent, while the rate of return for North Sea oil companies rose to 30.7 per cent from 25.3 per cent.

All trends in profitability have been rising strongly since the beginning of the decade. The fundamental reason for the continued improvement is the sustained rate of UK economic growth -- running at around 3.1 per cent a year before the recent storms in the financial markets.

The strong pound and a weak labour market has contributed to lowering the cost base. Fears of jobs being exported abroad, the effects of migrant workers and the continuing weakness of the trade unions in the private sector have all contributed to the phenomenon. "Record profitability in the second quarter of 2007 indicates that most UK companies are currently in a healthy financial state and well-equipped to withstand the credit crunch," said Howard Archer, chief UK economist at Global Insight.

"However, it is highly likely that the second quarter marked the peak in profitability and it will fall back over the final months of 2007 and during 2008. We expect profitability to be hit as economic growth slows significantly over the coming months, thereby dampening companies' sales and increasingly limiting their pricing power."

The gloomier outlook was confirmed by the latest survey by the Chartered Institute of Purchasing and Supply, which showed construction expanding at the slowest pace in three months in September.

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