UK MANUFACTURING AND IT IN FREEFALL SAY EXPERIAN
June 14 2004. Despite the economic recovery, figures out today (14 June 2004) from Experian show that companies have continued to struggle. In the third quarter of 2003, GDP grew by 2.2 per cent year-on-year, but company profitability registered its eighteenth consecutive quarter of decline. The average return on capital employed, according to Experian's Corporate Health Check, fell to 4.8 per cent in the 12 months to September 2003, down from 5.2 per cent in the 12 months to June 2003, down from a peak of 14.2 per cent in the first quarter of 1999.

Peter Brooker of Experian, author of the report, commented that: "The decline in profitability is not just concentrated in the hard pressed manufacturing sector, although engineering companies as a whole, registered a loss in the quarter. Profitability has also fallen in most service industries with the exception of Retailing and Motor Traders. Many of the other service industries have seen sharp falls in profitability over the year, with the decline being particularly severe in the Media sector (down from 1.3 per cent to -4 per cent), Information Technology (down from 2.7 to -5.0 per cent and Telecoms (down from 1.8 to -3.5 per cent).

"The Textiles and Clothing sector slipped into an overall loss-making situation in the first quarter of 2001 but quickly returned to profitability, but the last time the Engineering sector saw negative returns across the entire sector was in 1993, at the height of the last recession. It is unprecedented to have four sectors become loss-making at the same time.

"UK corporate profitability has fallen for 18 consecutive quarters and is now barely one-third the level achieved in early 1999."

The only sector to significantly buck the trend was Building & Construction, which has benefited from the ongoing construction boom. Other sectors registering an improvement were Oil (up from 17.7 to 17.8 per cent), Alcoholic Beverages (up from 13.3 per cent to 14.3 per cent), Non-food Retailers (up from 10.9 per cent to 11.8 per cent) and Motor Traders (up from 10.2 to 11.1 per cent).

The rate of decline on the previous quarter appears to have stabilised, which could indicate that the decline may have peaked and that corporate profitability might benefit from the generally more benign economic environment of the last year or so as output, particularly in the services sectors, has picked up, along with business optimism.

"Further signs that the balance my be tipping towards corporate recovery is that there are now three sectors with profitability at a ten-year high (Alcoholic Beverages, Oils and Construction) compared with just one, Alcoholic Beverages, in the previous quarter," added Peter Brooker. "And surveys from the British Chambers of Commerce and the Confederation of British Industry also report improved business conditions in the first quarter of 2004 in both manufacturing and services."

The decline in corporate profitability in the third quarter of 2003 - the latest for which audited statutory accounts are available - is across the board. Of the 24 industries analysed by Experian, 16 have seen their profitability fall in the last 12 months, 10 by more than one-fifth.

After the sharply increase in their rate of decline in the previous quarter, Engineering, IT, Telecommunications and the Media finally moved into overall losses as predicted in the previous Health Check. In the past, entire sectors reporting negative returns has led to further consolidation - and, generally, one or two high profile collapses - before the sectors return to profit after two or three quarters.

Nine sectors remain at their lowest since Experian began reporting corporate profitability in the early 1990s: Chemicals (5.4 per cent), Diversified Industrials (9.5 per cent), Electricals (6.8 per cent); Printing, Paper & Packaging (4.3 per cent), Household Goods (13.6 per cent), Leisure & Hotels (6.6 per cent), Support Services (12.5 per cent), Transport (3.1 per cent) and the Utilities (3.5 per cent). None of these are likely to become loss-making.

The decline on profitability has spread decisively into the South East, where its fallen by almost a third in the last year, from 7.1 per cent in Q3 2002 to 4.8 per cent in the third quarter of 2003. The decline in the South East between the second and third quarters was also the steepest in the country.

Despite the overall decline as a result of the dominance of the South East and, to an extent, the West Midlands, more regions than ever - seven - saw average profitability rise in the latest quarter, particularly in the East Midlands, where the growth from 9.2 per cent to 10.0 per cent was the best performance across the country. Average profitability among companies based in the South West went up from 11.1 per cent to 11.9 per cent.

However, while the South West, East Midlands, Yorkshire & Humberside and Northern Ireland have also made strong gains over the last year, in the West Midlands, average corporate profitability has fallen from 10.5 per cent to 7.7 per cent over the last year, in the North West from 6.0 per cent to 4.1 per cent , the North East from 12.5 per cent to 10.5 per cent and in Scotland from 6.6 per cent to 5.3 per cent.

Wales continued its modest recovery after five years of decline, while Yorkshire & Humberside cemented its position as the UK's most profitable region, having been 7th out of ten just two years ago.

"The financial results in the third quarter of 2003 reinforced the imbalances in the UK economy between the consumer and public sector economies on the one hand and the industrial economy on the other as well as within the industrial economy itself," concludes Peter Brooker. "The economic outlook does appear to be improving, but businesses are operating in a period of great uncertainty and it is likely to be the end of the year before any upturn is reflected by improvements in corporate profitability. In the meantime, companies are still not investing to improve productivity - despite the widening gap with the USA, in particular - as they wait to see how sustained any recovery might be.

"Trading conditions remain extremely challenging, especially with the recent sharp increase in the price of oil. Despite fewer companies failing, corporate insolvencies are still historically high, and some sectors - most notably Engineering, which covers a high proportion of the UK's manufacturing base, IT, the Media and Telecoms - are looking extremely weak. Therefore, it is more important than ever for companies to take every precaution to ensure that the companies they're doing business with are financially stable enough to make it through 2004."