Ups and Downs for company profits

Latest figures on UK corporate profitability bring good and bad news for business, the Institute of Directors (IoD) said today. Although company profits remain high in the service sector they are still low in manufacturing, the IoD pointed out. Net rates of return in the first quarter of 2005 increased to 17.5% in the service sector but fell to just 6% in manufacturing.

The figures mean that over the past 5 years the rate of return in the manufacturing sector has fallen by a third whereas in the service sector it has remained unchanged.

The IoD said it was also concerned about the decoupling of business investment from corporate profitability. Current rates of return would ordinarily be associated with stronger business investment, but instead, corporate capital expenditure remains weak. Business investment rose by just 0.1% (qtr-on-qtr) and 2.5% (yr-on-yr) in the first quarter of 2005. In addition, there have been significant downward revisions to business investment over the 2002-2004 period.

Graeme Leach, Chief Economist at the IoD, said:

"Contrasts leap out from the latest statistics. First, the divergent profitability of the manufacturing and services sector in the UK. Second, the weakness of business investment, despite strong profitability in the services sector. What is unclear is the extent to which weak business investment is the result of companies plugging pension fund deficits, or whether it is a measurement issue owing to under-recording of IT investment."