This is the longest, sustained period of declining profitability since the last recession, said Peter Brooker of Experian, the author of the report. While productivity has generally improved, the strength of the pound against the euro has continued to hit exports, while its weakness against the dollar has made imports from the US, as well as commodities priced in dollars, more expensive. Manufacturers, in particular have been unable to pass on these costs and, of course, they have to compete with cheap imports from Europe and the Far East.
There is now the added problem of the slowdown in the US economy. While the US only accounts for 15 per cent of UK exports, the knock-on effect of a slowdown, never mind a recession, on economies more dependent on the US, will inevitably have an impact on jobs at UK companies which operate in, and export to, those markets.
After inflation is taken into account, the ‘real’ level of profitability has fallen from 11.73 per cent in the second quarter of 1999 to 10.38 per cent in the second quarter of 2000 – its lowest level since the beginning of 1998.
Profitability fell in the year to June 2000 across both manufacturing and service sectors, with 19 of the 23 sectors covered by the report suffering a year-on-year decline. Four industries – Printing, Paper & Packaging, Distribution, Retail and Transport – have seen their profitability fall by more than one-fifth and another, Textiles & Clothing, is down by almost one-third.
It’s noticeable that four out of the five worst performing industries are strongly consumer oriented and all highly price sensitive, said Peter Brooker. Consumers have become highly price conscious, believing that many goods are overpriced in the UK. Survey evidence shows continued downward pressure on retail goods prices. The heightened price consciousness among consumers is having a knock-on effect among services, such as Distribution, and manufacturers of consumer goods, especially in the Textiles sector.
The motor industry has been particularly hit by consumers demanding lower prices – and being willing to wait for them – which has had a knock-on effect on manufacturing suppliers and the dealership market. Profitability among Motor Traders has fallen by over 11 per cent in the year to June 2000 and in Engineering by 16 per cent.
The four industry sectors to improve their profitability over the 12 months were Building & Construction (14.54 per cent in Q2 1999 to 15.53 per cent in Q2 2000), Leisure & Hotels (11.97 per cent to 12.27), Food Retailing (13.90 per cent to 14.39 per cent) and the Utilities (8.57 per cent to 8.84 per cent). However, despite its longer term success, the Food Retailers saw a sharp decline in profitability between the first and second quarters of 2000.
Technology based companies have not escaped the general downturn. Profitability among Information Technology companies has fallen by almost one-fifth between the second quarter of 1999 and the second quarter of 2000, and from 25.88 per cent in Q1 2000 to 25.17 per cent in the second quarter. The Electricals sector has suffered much less of a decline, but has, nevertheless, fallen from 16.33 per cent to 15.31 per cent over the year.
Profitability fell in every part of the country between the second quarters of 1999 and 2000, except in the West Midlands, the UK’s most profitable region. However, even the West Midlands fell between Q1 and Q2 2000, while both the North East and Scotland showed slight improvements.
Although there is some evidence of a North/South divide, with Scotland and the North West suffering the greatest year-on-year falls in profitability, as well as levels of profitability well below the UK average, argues Peter Brooker, the real divide is between the central belt from the north of England down through the Midlands to the South East, and the ‘fringes’ of Scotland, Wales and East Anglia. Despite the mild upturn in Scotland in the latest report, these three regions all lie at the bottom of every regional ranking of measures of profitability.
The most positive news from the Health Check is that productivity has continued to rise across most sectors of British industry – up by 6.9% in the 12 months to June 2000 and 16.4% over three years. Food Manufacturers, Printing & Packaging, the Media Distribution, Telecoms, Transport, Motor Dealers and Food Retailers have been the most successful in this respect.
According to recent surveys, manufacturers across all parts of the country are scrapping or cutting back investment plans, concluded Peter Brooker. Advertising spending has also fallen for the first time since the recession of the early 1990s and jobs losses are expected to continue as profit margins, particularly among manufacturers, are squeezed further.
While output and export volumes rose over the summer, the CBI’s monthly surveys show that the majority of manufacturers expect to have to make further price cuts and are cautious over long-term prospects. Industry was looking to the Bank of England Monetary Policy Committee to reduce interest rates at their January meeting in the light of weakening economic conditions: companies have held down prices and squeezed margins by driving down average unit costs and raising productivity, but were disappointed. The fundamentals have not changed and, with the US economy weakening, the outlook for manufacturing for the rest of the year is more closures, job losses, cancelled investments and further erosion of profitability.
The Experian Corporate Health Check is based on the audited financial results of the 2,000 largest companies in the UK and reflects the combined effects of current UK economic policy and market conditions on the actual financial results of British companies. Experian’s Business Information database, the largest of its kind in the UK, holds the same data on every limited company in the UK.
