Here's some news from the Office for National Statistics that may surprise you. Contrary to the widely held view that Britain's economic recovery is grinding to a halt, corporate profitability is at its highest level since the final quarter of 2008. There are some caveats to that headline finding – the figures are for non-financial corporations and are slightly out of date, covering the three months to the end of March – but still, this is not the picture of corporate UK most of us have in our minds.
Should the statistics give us hope that the economic outcome may be better than some of the more gloomy forecasters expect? Well, to a point.
The problem is that we know from the GDP statistics that the economy as a whole was more or less flat during the first quarter of the year. Improved profitability must, therefore, have been down to lower costs. And given the higher rate of inflation, we are almost certainly talking about labour costs. A big part of the explanation for improving profitability must be the wage restraint we have seen in the private sector.
Larger profits are, of course, good news for tax revenues and also for the prospects for capital investment and job creation. It may be that we see improving trends on these fronts, which would be welcome. But companies do not commit to new investments or additional hires unless they are confident that their profitability will endure. So we may not see the benefits come through, particularly if companies take the view that wage restraint will mean lower spending and thus lower sales in future.
The detailed breakdown of the profitability statistics also makes interesting reading. Most of the improvement has come from the oil and gas exploration companies – even if higher oil prices endure, will the controversial Budget tax hike on the North Sea spell an end to that? – while the performance from other parts of the private sector has been less impressive.
Profitability in the services and manufacturing sectors actually declined during the first quarter, and despite remaining above the levels seen during the recession, there has been no return to the figures of pre-recession times.
The latest data from the services sector, the dominant part of the economy, suggests that growth is currently insufficient to sustain large-scale job creation. These profitability figures will add to those anxieties rather than ease them.
The good news is that it looks as if the private sector may, so far at least, have been coping better with the headwinds buffeting the economy than we might have imagined. But wage restraint cannot continue indefinitely without the resulting squeeze on household incomes reining in profitability once more. Just one cheer for yesterday's statistics, then.Reuse content