Profitability of UK firms running at all-time high

Good times are rolling for UK plc, according to official figures yesterday showing corporate profitability is running at record highs.

The Office for National Statistics said profits - defined as the net rate of return - of non-financial companies was 15.5 per cent in the fourth quarter of last year, up from 15.2 per cent in the previous three months and the highest since quarterly records began in 1989. The figure for 2006 as a whole was 15.1 per cent, up from 14.3 per cent in 2005 and the highest since annual records started in 1965. Add in the lucrative financial services sector, which these numbers do not cover, and profits would have been even higher.

Howard Archer, chief UK economist at Global Insight, said: "This impressive performance occurred despite the extended squeeze on margins coming from high energy and commodity prices, although lower oil prices would have helped margins in the fourth quarter. Firms were generally able to keep their overall costs down by limiting wage increases, while sustained healthy economic activity through 2006 lifted demand and boosted companies' pricing power."

The stellar corporate performance has been reflected in the stock market, notwithstanding its recent wobble. The FTSE 100 index of blue-chip stocks has surged by more than 80 per cent in the past four years.

Adrian Cooper, economic adviser to the Ernst & Young ITEM Club, said: "The latest figures underline the strength of the UK company sector overall. This is at last feeding through to strong business investment, which is now the most dynamic driver of GDP growth."

Figures last week showed business investment surged by 4.5 per cent in the fourth quarter of 2006 to stand 13.5 per cent higher than a year earlier. However, a breakdown showed a considerable divergence between the struggling manufacturing sector and buoyant services sector. While manufacturing profits were 10 per cent in the fourth quarter, those of services firms stood at 20.9 per cent.

"The renewed strength in the pound over the last year has only added to the problems facing UK manufacturers, and the Budget changes in capital allowances won't do them any favours either," Mr Cooper said.

Meanwhile, the latest consumer sentiment barometer from Nationwide, the building society, showed confidence has improved for the third consecutive month but remains well below levels seen a year ago. The survey's consumer confidence index registered 88 this month, up from 85 in February but down from 95 in March last year.

"Although consumers appeared slightly more upbeat in March, the overall picture is still subdued," said Fionnuala Earley, Nationwide's chief economist. "With uncertainty about the interest rate position, but the risk clearly on the upside, consumers are unlikely to recover confidence in the near-term."

The Bank of England's Monetary Policy Committee begins its latest meeting today with a decision on interest rates due at midday tomorrow. Borrowing costs are widely expected to be frozen at 5.25 per cent for a third month, although a quarter-point increase has not been ruled out.