Firms' profitability hits a record high

British companies' profitability jumped to a record in the third quarter of last year as the economy boomed. But experts are warning that the credit crunch will make life much harder for UK's businesses.

Non-financial companies had a 16 per cent net rate of return in the three months to the end of September, the best performance since quarterly records started in 1989, the Office for National Statistics said yesterday.

Manufacturers overcame the strong pound to boost profitability to 9.7 per cent from 8.8 per cent in the previous quarter. But the service sector, which is about three-quarters of the economy, saw its returns drop to 21.2 per cent from 21.4 per cent as higher credit costs and economic uncertainty began to hit consumer spending.

Hetal Mehta, economic adviser to the Ernst & Young Item Club, said: "Today's figures for corporate profitability reveal just how strong the UK company sector was before the credit crunch hit. However, the first effects of the financial market turmoil can be seen in the dip in service sector profitability, and profits in fin-ancial and business services are likely to have fallen sharply in Q4."

Companies face more testing times because of higher borrowing costs and a slowing economy caused by the credit crunch.

The record oil price of about $100 a barrel is a further blow to profitability and companies' ability to invest. Investment growth is set to slow to 3.25 per cent this year from 6 per cent in 2007, according to Treasury forecasts.

Roger Bootle, economic adviser at Deloitte, said: "The extreme cyclicality of profits means that after a double-digit gain... I now expect nominal profits to fall outright this year by around 3 per cent and to continue to fall in 2009."

The net rate of return for oil and gas extraction companies increased to 32.5 per cent, compared with the revised estimate of 30.1 per cent for the previous quarter.