Rising costs and taxes hit corporate profitability

Apr 07 2003 by Brian Amble Print This Article

UK corporate profitability has fallen for the 14th month in a row, according to Experian in its latest Corporate Health Check. And much of the blame is due to the costs of new employment legislation and the rise in employers' national Insurance Contributions.

The Corporate Health Check is compiled from 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.

Peter Brooker of Experian, the author of the report, said that the decline is gaining momentum. “The fall over the last four quarters is easily the steepest annual decline during the four years that profitability has been in decline - and the rate of decline has accelerated in each of those four years.”

Business failures in 2002 rose by almost ten per cent to nearly 19,000.

"The latest decline in profitability coincides with a further drop in business confidence across almost all parts of the UK,” Brooker added. “Part of the reason for lower profitability lies in substantially higher costs for businesses.

“Low capital investment is also a factor, depressing profitability to such an extent that it threatens the long-term viability of many companies.”

With no other ways left to cut costs, more than half of manufacturing employers claim that the rise in National Insurance will force them to cut jobs.

Last week, the monthly Report on Jobs from the Recruitment and Employment Confederation (REC) and Deloitte and Touche, revealed a sharp rise in the growth of available staff. The availability of both permanent and temporary staff saw a five point growth in March.

The decline in corporate profitability is across the board, affecting industries serving both domestic and export markets. Of the 24 industries analysed by Experian, 17 have seen their profitability fall in the last 12 months, eleven by more than one-fifth (one more than between the second quarters of 2001 and 2002).

The IT and Telecoms sectors continued their rapid decline, with profitability in both sectors in Q3 2002 falling by almost a quarter on the previous quarter. Profitability in both sectors has more than halved in the last 12 months., while the quarterly rate of decline in the latest quarter in the Telecoms sector was the steepest yet seen.

The situation is made still gloomier by the increasing fragility of consumer confidence in the face of the war in Iraq, stagnating house prices and multiple tax rises.

"The economic outlook has changed considerably since the third quarter of last year," said Brooker. “Whether consumers will have the confidence to prop up the economy under these circumstances is debatable - particularly as they will have begun to see the effect of the largest direct tax rises since the current government came to power (National Insurance contributions) and, especially in the South East, swinging increases in Council Tax rates.”

As a result, says Booker, the decline in profitability is gaining momentum. “The fall over the last four quarters is easily the steepest annual decline during the four years that profitability has been in decline - and the rate of decline has accelerated in each of those four years.”

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