Non-financial firms improve profitability but still face economic pressure

THE profitability of non-financial UK firms increased during the third quarter of 2011 to reach its highest rate for three years, it was revealed yesterday.

However, a leading analyst has warned that companies could still cut jobs this year in response to pressure on profits. According to figures released by the Office for National Statistics, private non-financial corporations’ net rate of return was 12.9 per cent in the third quarter of last year, which is the highest value since the third quarter of 2008 when the figure was 13.5 per cent.

Howard Archer, the chief UK and European Economist at IHS Global Insight, said this figure was likely to have been supported by modest growth and a reduction in the squeeze on many companies’ margins, which would have come from an easing back in input prices from the highs seen earlier in 2011.

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He added: “It is notable though that the rate of improvement in profitability moderated in the third quarter, and it seems highly likely that profitability will come under increasing pressure in the near term at least as the economy’s struggles increasingly hit companies’ sales volumes and pricing power.

“The worry is that increasing downward pressure on profits may well cause many companies to scale back their investment plans and tighten their labour forces by shedding some workers.”

Mr Archer said the improvement in profitability in the third quarter was mainly due to the net rate of return for services companies rising to 15.9 per cent from 15 per cent in the second.

This was the best performance seen since the fourth quarter of 2008.

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He added: “Service sector output picked up appreciably in the third quarter, when it expanded 0.7 per cent quarter-on-quarter, which undoubtedly lifted profitability.

“However, this net rate of return is still below the levels generally seen over the decade up to 2008, which reflects the fact that services companies are generally finding life much tougher than they did before the 2008 to 2009 recession.”