Home » Rise in UK Company Profits Puts Bank’s Stance on Prices Under Scrutiny
News UK United Kingdom

Rise in UK Company Profits Puts Bank’s Stance on Prices Under Scrutiny

British companies have boosted their profitability, according to the latest official figures, insulating themselves against cost pressures and fuelling claims that profiteering has played a big part in the UK’s inflation story.

In a week when Joe Biden said he was only winning the war against inflation in the US because corporate profits were declining, figures released on Thursday by the Office for National Statistics showed UK business profits increased in the first quarter of 2023.

Manufacturing firms increased their net rate of return to 8.8% in the first quarter, from 8.4% in the fourth quarter of 2022. Services companies, which account for about three-quarters of economic activity, increased their net rate of return to 16.1%, an increase of 0.4 percentage points from the last three months of 2022.

The rate of return is a measure of profitability that shows the margin between operating profits and the cost of assets used to generate those profits. Unions have accused firms of putting up prices by more than the rise in their costs, a trend nicknamed greedflation.

It is a hot topic because the Bank of England has consistently said the small ups and downs registered by the ONS in its calculations of corporate profitability show little evidence of profiteering. It has repeatedly urged workers to restrain wage demands and played down the need to tell companies to restrain price rises.

On the other side of the argument stand a growing number of academics, thinktanks and unions.

The TUC general secretary, Paul Novak, said he was shocked by the ONS figures, which he claimed showed “a culture of entitlement is alive and well” among the large corporations that he said were mostly to blame for higher prices.

Sharon Graham, the head of the Unite union, arguably credited with doing more than anyone in the UK to promote research into corporate profits, said companies were exploiting a crisis.

Philip King, a former government adviser and small business commissioner until 2021, said many small and medium-sized companies would wonder what the fuss was about. He said it was clear from the figures that “companies are maintaining their profitability despite the difficult trading conditions they have faced”, and it was large businesses that would be to blame. These “typically have more flexibility when it comes to increasing prices and cutting costs”, he said.

The International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and many leading academics say steady profit margins show businesses are doing better than any other participants in the economy, in particular workers.

An OECD report last month found average profit margins in the UK increased by almost a quarter between the end of 2019 and early 2023. Stefano Scarpetta, a director of the OECD, said it was “somewhat unusual that in a period of slowdown in economic activity we see profit picking up”.

George Dibb, an economist at the IPPR thinktank, said the Bank of England was “plain wrong” to consider steady profit margins a non-story.

On closer inspection the headline average is if anything worse than it first appears. Overall, the net rate of return for all non-financial businesses – a measure that excludes banks and insurance companies but includes North Sea oil and gas firms – increased from 9.8% in the last quarter of 2022 to 9.9% in the first quarter. That shows margins remained consistent through one of the worst winters for cost of living rises and cuts in disposable incomes for several generations.

However, excluding North Sea oil and gas firms, which showed a slump in profitability in the first quarter as energy prices fell from their peaks, dragging down the average, the level of profitability for most firms jumped from 9.6% in the last quarter of 2022 to 10.6% in the first quarter of 2023.

Richard Murphy, a professor of accounting at the University of Sheffield, said low wage rises in most sectors outside financial services meant large companies were probably doing much better than smaller ones.

Murphy said half of all UK company profits were generated by small and medium-sized companies and the other half by a few thousand larger firms.

Another interest rate rise is expected next month and the main reason given by the Bank will be that wages are rising too quickly, not that profits are rising too quickly. It is a stance that is going to become increasingly contentious.

Source: The Guardian