UK’s corporate profitability fell in second quarter

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The profitability of non-financial UK companies fell in the quarter to June, according to official data that appears to reaffirm the view of interest rate-setters that higher corporate profit margins have not played a key role in driving up inflation.

Companies made a net rate of return of 9.6 per cent in the three months to June, the Office for National Statistics said on Friday, down from a revised 10.7 per cent in the previous quarter and below the pre-pandemic average of 10.9 per cent.

The findings, which exclude data from the financial services sector, are broadly in line with the view of the Bank of England that “greedflation” — where businesses increase prices beyond levels their own price pressures would demand — has not considerably pushed up inflation, which stands at 6.7 per cent.

Inflation surged to a four-decade high of 11.1 per cent in October 2022, with food price growth rising to a 45-year record of 19.2 per cent in March, raising concerns among some economists that the trend was fuelled by companies pushing up prices excessively.

But as it held interest rates at 5.25 per cent on Thursday, the BoE again rejected concerns about “greedflation”. It pointed out that over the past two years aggregate profit margins had “remained squeezed as many companies were unable to fully pass through higher costs into output prices while sales volumes were weakening”.

The sectoral analysis of the ONS data, which excludes the financial services industry, showed the tailing-off of the energy price shock following Russia’s full-scale invasion of Ukraine early last year and the effects of the subsequent imposition of a windfall tax on North Sea oil and gas producers.

Net profitability for North Sea oil and gas producers dropped to 3.2 per cent in the quarter to June, the lowest since the same period in 2021 and a long way from the peak of 22.3 per cent in the final quarter of last year.

Profit margins remain well below their pre-pandemic levels in the manufacturing sector, where the net rate of return fell to 7.8 per cent from 8.6 per cent in the first quarter. Over the past year, the margins in the manufacturing sector averaged 7.6 per cent, compared with an average of 14.4 per cent between 2014 and 2019.

In the services sector, profitability dropped to 15.2 per cent in the three months to June, after rising 1.2 percentage points to 16.1 per cent in the previous quarter. However, both figures remained well below the recent peak of 19 per cent in 2015.

“Overall, there is little evidence of persistent ‘greedflation’,” said Tomasz Wieladek, chief European economist at the investment company T Rowe Price. He expected profitability in manufacturing and services would be “squeezed significantly” going forward because of persistent elevated wage pressure and weak demand.

The BoE this week noted that companies were trying to rebuild margins as cost pressures moderated but added that many businesses “currently see limited scope for margin rebuilding through further price increases”.