Record rise in profitability due to services, not manufacturing

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The Independent Online

A record rise in corporate profitability is masking a marked divergence between the fortunes of the manufacturing and services sectors, official figures showed yesterday.

The Office for National Statistics said the net rate of return for non-financial companies was 14.7 per cent in the three months to June, up from 14.4 per cent in the first quarter. This was the highest since quarterly records began in 1989 and is higher than any of the annual peaks going back to 1965, figures for Citigroup showed.

Michael Saunders, Citigroup's chief UK economist, said: "It seems that the rate of return on capital is the highest within the past 40 years."

However, the increase was entirely driven by a rise in services sector profitability to 20.1 per cent, the first time it has vaulted the 20 per cent level and another 17-year record.

The rate of return for manufacturers fell to 6.1 per cent in the second quarter from 6.8 per cent in the previous three months, making it the weakest result since 1992. Oil companies' returns also slipped. Business groups said the figures showed the extent to which rising costs, particularly of energy, had eaten into manufacturers' profits.

Steve Radley, the chief economist at the lobby group EEF, said: "Manufacturers are enjoying rising sales volumes, but a continuing squeeze on margins risks undermining the recovery in investment. The Chancellor must not add further costs on to industry in his pre-Budget statement."

Citigroup's Mr Saunders said the figures highlighted the impact on the UK of globalisation, which had expanded the market for global services but increased competition for factory goods.

"There is also a sense in which the UK's success in knowledge-intensive services actually makes conditions tougher for manufacturing because it supports high levels of pay that exacerbate the competitive pressures."

Analysts said the fall in crude oil prices below $59 a barrel to a seven-month low could boost profitability across the board in the coming months.

Roger Bootle, the chief economic adviser to Deloitte, the accountancy firm, said: "It is wholesalers and retailers who might benefit the most from lower energy prices, given that they have struggled to pass higher goods prices on to consumers."

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