UK firms' profits fall for fourth year

Companies freeze recruitment; Baghdad Bounce fails to materialise; Higher business costs blamed
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The Independent Online

Profits of British companies have fallen for four straight years, according to the latest Experian Corporate Health Check. Profitability measured by average return on capital fell to 5.76 per cent in the first quarter of 2003 from a peak of 14.18 per cent in early 1999, the survey said.

Profits of British companies have fallen for four straight years, according to the latest Experian Corporate Health Check. Profitability measured by average return on capital fell to 5.76 per cent in the first quarter of 2003 from a peak of 14.18 per cent in early 1999, the survey said.

The fall, down from 6.35 per cent in the 12 months to December last year, was the first time that UK corporate profitability has fallen below 6 per cent and represents a longer period of sustained decline than in either of the last two recessions, said Experian after examining audited financial results of the 2,000 largest companies in the UK.

This means that profits have fallen by more than 30 per cent in the past 12 months and 60 per cent over four years. The decline was seen across the board: nine out of 24 industry sectors studied are down by more than a third over four years, and 10 have fallen by more than half in a year. Business confidence continued to fall in almost all Britain's 12 regions.

Experian said part of the reason for lower profitability and lower business confidence lay in higher business costs, including the increase in April of national insurance contributions. Many companies have frozen recruitment and investment plans.

This is underlined by the latest Confederation of British Industry survey of the service sector, showing that almost one-in-five companies had cut jobs over the summer compared with just 3 per cent in the previous survey that covered the war with Iraq. This was the steepest cut since the survey began in November 1998.

The CBI said the sector had failed to cash in on the spending boom that benefited high-street retailers and estate agents. Optimism among companies selling services to consumers tumbled to its lowest level in a year as business volumes dropped to their lowest levels since May 2001.

But the gloom was offset by the rise in optimism among business and professional services companies, where optimism rose for the first time in a year. The health of business and professional services companies is a bellwether of the corporate sector, as they sell to other companies rather than to consumers. One in 10 of these businesses was upbeat about prospects, compared with a net figure of minus 2 per cent when the survey was last conducted three months ago.

Profitability also rose for the first time in more than two years. The rise in confidence was fuelled by an increase in business volumes - a sign that companies are loosening the purse strings. "The conflicting trends of the service sector clearly reveal the imbalances in the UK economy," said Ian McCafferty, the CBI's chief economic adviser.

"Among business and professional services companies, the mood has lifted [but] consumer services companies have missed out on the consumer spending revival that retailers have enjoyed."

Steve Edmonds, head of entrepreneurial business services at the consultant Grant Thornton, which sponsored the survey, said: "The service sector appears to be no closer to mounting a successful and sustainable recovery."

The Experian report's author, Peter Brooker, said the decline in profits appeared to be gaining momentum, with the year-on-year fall up to the first quarter of this year being the steepest since the 1999 peak.

While the outlook for the rest of this year remained challenging, the longer-term outlook was more positive. "Although there has been little sign of the expected 'Baghdad Bounce' following the official end of hostilities in Iraq, economists are more confident of an upturn in both the US and the eurozone in 2004," Mr Brooker said.

Information technology, telecommunications, engineering, transport and the media were the worst hit, down more than 80 per cent during the past four years. But the oil and alcoholic-drinks sectors saw their profitability grow during the period.

Meanwhile the Ernst & Young ITEM Club yesterday warned the UK could be in the grips of a "deflationary spiral" unless economic growth picked up soon. Growth could be undermined by the impact of the uncertain global climate on business spending, the continuing sluggishness of the eurozone and by consumers becoming increasingly weighed down by their debt burden.

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