UK Companies Are Maintaining Profitability

The profitability of UK non-financial corporations in Q2 2013 as measured by net rate of return (NNR) was estimated by 11.4% according to the ONS. It compares well with the last 18 months but is lower than 2011. The revised estimate for Q1 was 11.3%.

The manufacturing sector reported net rate of return of 7.2% in Q2 2013 one of the lowest levels since 2003. Services NRR was estimated to have been 15.1% in Q2 equal to Q1 but higher than the last two and a half years. UK continental shelf companies (oil & gas) NRR, which are not directly comparable with other industrial sectors and can be very volatile, grew by 37.4%. Non-UKCS companies grew by 10.7%.

Putting it into context, real GDP grew by 0.7% in Q2 2013 and the NRR of UK companies was 11.4%, an increase of 0.1%. The operating profits of UK non-financial corporations increased by 1.2% (according to Quarterly National Accounts) suggesting that profits are increasing at a faster rate than capital employed.

Business Services Still Under Pressure

Volumes of business in the service sector rose in the most recent quarter according to the CBI services survey, but while consumer services improved slightly, business services did not.

The value and volume of consumer services increased over the last three months with the survey balance up 10% the highest since August 2007. Profitability did not change much but with costs rising only 2%, the best figures since November 2007. Sales prices increased and are expected to rise again during the next quarter.

In business and professional services it was slightly different. Although value and volume of business was little changed, according to the survey, prices and profitability fell, giving a negative balance.

The survey also reported that both consumer and business services were cutting back on staff. It also reported that on the whole both sectors were more optimistic about the business situation than the last quarter and plans to expand were more numerous in consumer services than business services. A factor affecting service sector businesses expansion decisions was concern about the strength of demand and their ability to raise funds was considered a barrier to growth.

Normal Services May Soon Be Resumed

The most recent CBI Services Sector Survey suggests that service sector businesses are still running at below normal levels but less than in the previous quarter. Pressure on profits and deflation are not helping.

Business and professional services' volumes and values both increased slightly for the first time since May 2008 and many firms expect it to continue to increase over the next three months. However they remain below normal for the seventh consecutive quarter. Profitability suffered because of lower prices, which are expected to fall further over the next three months as competition for business continues, but may increase slightly over the coming quarter. Employment also fell again for the fifth successive quarter but less steeply than earlier in the year. Business and professional services are more optimistic than they have been for a long time.

Consumer services values and volumes fell slightly but at much slower rates than the previous three quarters. Over the next three months firms expect values to stabilise and volumes to decline. Optimism is not as strong as three months ago. Profitability in consumer services also suffered from lower prices which are also expected to continue to fall over the next quarter. Employment in consumer services was stable.

Service sector activity was less weak than in recent quarters and things may be beginning to look a bit better.