Profits at five-year low with no let-up in sight

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The Independent Online

Businesses' profitability plunged to its lowest rate for five years in 1999, according to official data published yesterday. The snapshot is the latest in a run of reports highlighting gloom in the corporate sector.

Businesses' profitability plunged to its lowest rate for five years in 1999, according to official data published yesterday. The snapshot is the latest in a run of reports highlighting gloom in the corporate sector.

The net rate of return by non-financial corporations fell to 12.0 per cent in 1999, from an average of between 12.8 per cent and 12.9 per cent over the previous three years. It is the lowest since 1994.

The data will support evidence that firms' profit margins are being squeezed between fierce high street competition and rising bills for staff and raw materials. The biggest fall was in manufacturing, where rates of return tumbled from 10.8 per cent to 7.1 per cent - the lowest figure since 1993. The profitability of services companies fell by 0.1 per cent to 15.3 per cent, a two-year low.

Figures for the first quarter of this year showed the trend continuing with a fall in profitability for both services and manufacturing.

The Office for National Statistics, which compiled the data, said: "A fall in growth in the overall output of manufacturing and services and competitive pricing conditions, including a rise in input prices and higher wage costs, reduced profit margins."

The report comes a day after two surveys - from the Institute of Directors and the consultants Dun & Bradstreet - found a marked fall in business leaders' optimism on the economic outlook. Analysts are anxiously awaiting to see if the gloomy picture is confirmed by the authoritative quarterly industrial trends survey from the Confederation of British Industry, published tomorrow.

Robert Barrie, chief UK economist at Credit Suisse First Boston, said it showed the pressure that the corporate sector was under. "It shows that the pressure on profits is not just to do with the exchange rate and not just to do with manufacturing," he said.

"The pressure comes from all sorts of sources such as structural change in parts of the services sector. It turns out that large parts of the corporate sector are under this pressure."

He said that the fall in profits explained the recent fall in investment by companies, seen in recent ONS data. The data could also be used as an argument against a further interest rate rise, he said.

Separate research by CSFB of profits as a ratio of turnover picked up a drop in profitability just before each of the last three recessions, in 1973, 1979 and 1990. But Mr Barrie said he did not believe the UK was on the brink of a recession.

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