View from City Road: A better recession this time around

With the FT-SE 100 hitting a new high yesterday on hopes of interest rate cuts, the markets' bulls need little encouragement. But they will find the price of today's Bank of England quarterly bulletin worth paying. The regular report on corporate profitability lists some encouraging comparisons between Britain's corporate performance today and at the time of the last recession.

The return on capital in the non- North Sea sector was some 3 percentage points higher throughout this recession than during the previous one in 1979-81: the return this time was 6.9 per cent at its lowest point last year against just 3 per cent in 1981. Just as encouraging, business investment has been sustained at a higher level: it represented 8.1 per cent of national output last year against 6.2 per cent in 1982.

The Bank's work suggests that only half a percentage point of the improvement in rates of return is due to moving cash-cow utilities from the public to the private sector. Most of the hard-won improvements in productivity, labour practices and competitiveness during the 1980s have stuck. Perhaps partly as a result, capacity utilisation was also better than during the last recession. Manufacturing output fell by less than half its previous drop, and has declined less than Germany's.

The caveat is debt. One of the reasons why British companies were so quick to protect their margins during this recession is that they had little option. Companies' borrowing requirement averaged 7.4 per cent of national income in the five years to 1992, against just 2.2 per cent in the five years to 1982. Many small firms are not out of the woods yet.