Saturday, April 07, 2007

Corporate profits at all-time high

Corporate profits at all-time high
By Chris Giles, Economics Editor
Published: April 3 2007 22:05 Last updated: April 3 2007 22:05





Corporate profitability rose to its historically highest level at the end of last year as manufacturing and service sector companies benefited from strong sales growth combined with lower energy prices and subdued wage pressures.

Economists said soaring profitability in the fourth quarter augured well for business investment, underpinning the Bank of England’s strong growth forecast for this year.

The net rate of return on capital rose to double-digit levels even in manufacturing.

With corporate spending likely to remain strong and business surveys suggesting companies will not fully pass on lower energy costs to customers, pressure on the Bank to put up interest rates – perhaps as early as Thursday– has been intensifying.

Traders in the money markets reckon there is now nearly a 50:50 chance the monetary policy committee will raise rates to 5.5 per cent this month.

A rate rise certainly would not shock the markets as it did in January.

Official figures on Tuesday showed the net rate of return on capital in non-oil UK companies rose to 14.7 per cent in the fourth quarter last year; the highest rate of profitability since quarterly figures were first published in 1989.

Including profits made on North Sea operations, the 15.1 per cent net rate of return for the whole of 2006 showed UK corporate profitability was at its highest level for more than 40 years.

Adrian Cooper, economic advisor to the Ernst & Young Item Club, said: “Profitability is at record levels. This is at last feeding through to strong business investment, which is now the most dynamic driver of GDP growth.”

The Treasury expects real capital investment to increase by between 6.5 and 7 per cent this year after 6.5 per cent growth last year.

Copyright The Financial Times Limited 2007











© Copyright The Financial Times Ltd 2007. "FT" and "Financial Times" are trademarks of The Financial Times Ltd.

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