Profits dip in services and manufacturing sectors

The profitability of the services and manufacturing sectors fell in the first quarter of 2011, official figures showed today, adding to worries about the strength of the UK's economic recovery.

The manufacturing sector saw its net rate of return fall to 6.1% in the quarter, its lowest rate for a year, according to the Office for National Statistics.

Profitability in the services sector fell to 14.9%, slowing from 15.2% in the final quarter of 2010.

However, the overall profitability of UK companies outside the financial sector rose in the quarter to 12.7% - the highest level since the fourth quarter of 2008 - as oil and gas explorers benefited from the rising price of oil.

Oil prices hit a a 32-month high in April as the crisis in Libya caused supply disruption. This helped oil and gas exploration companies' profitability increase to 47.6%, its highest level since the third quarter of 2008 when oil prices peaked at 147 US dollars a barrel.

But manufacturers saw their net rate of return retreat sharply from the 11.2% seen in the fourth quarter of 2010.

Companies in the services sector, which accounts for more than three-quarters of gross domestic product, saw growth slip backwards from the final quarter of 2010 and are still well below pre-recession levels.

Howard Archer, chief economist at IHS Global Insight, said: "Manufacturers enjoyed a decent 2010 but activity seems to have lost significant momentum overall recently and their margins are being squeezed by elevated input costs."

Excluding the offshore energy operations, UK non-financial companies, which includes services, manufacturing, construction and power supply, saw their profitability hit 11.3% in the quarter.

This was slightly higher than the final quarter of 2010 and its highest since the first quarter of 2009 and suggests that construction and power supply companies have performed well, offsetting the weak performance of services and manufacturing.