The strong business profitability witnessed at the end of last year looks set to continue this year, economists have claimed.
According to economists at Deloitte, the combination of falling energy prices and the recent increase in firms’ pricing power means that last year’s healthy profit levels show no signs of falling.
The net rate of return (profits relative to the capital stock) in the non-oil sector rose from 14.2% in quarter three to 14.7% in quarter four, contributing to the highest overall profitability since 1998, Deloitte claimed.
“The economic environment has recently become more conducive to strong profits growth over the rest of this year,” said Roger Bootle, economic adviser at Deloitte.
“For a start, the domestic economy has continued to gather momentum, despite the three rises in interest rates since last August.
“Firms have also had more success in the last few months in pushing up their prices, particularly in the manufacturing and retail sectors.
“Both factory gate and high street inflation have been accelerating, with most surveys suggesting that firms expect to boost their pricing power further.
“Meanwhile, the recently announced cuts in utility prices mean that it will not be long before profits are receiving a boost from the cost side too.”
According to Deloitte, the manufacturing sector already appears to be benefiting from easing energy costs, with manufacturing profitability leaping from 6.9% in Q3 to 10.0% in Q4.
“In addition, last year’s pick-up in investment reveals that firms are becoming more willing to spend these extra profits,” Bootle said.
However, he added that some factors, such as a high exchange rate, are likely to offset some of this boost in profits.
© Crimson Business Ltd. 2007
