Manufacturing slump dents UK profitability

The Office for National Statistics says that overall UK companies’ profitability was dented more by slowing returns from an already problematic manufacturing sector than by the poorer performance of services companies. The net rate of return from manufacturing companies in Q3 2008 was 4.4%, a 0.2% contraction on the second quarter of the year and a 2.9% drop on the same period in 2007. The average net rate of return from manufacturing companies for the whole of 2007 was 6.5%.

Worse seems certain to come as the ONS’s production data for the fourth quarter of 2008 shows that manufacturing output decreased by 5.1% compared with the third quarter of 2008. It reports that for that period the most significant decreases were 9.4% in the basic metals and metal product industries, 7.7% in the transport equipment industries and 5.8% in the paper, printing and publishing industries. All but one of the 13 sub-sectors in the ONS’s definition of the manufacturing sector saw a decrease in output in the last three months of 2008.

The net rate of return from the service sector in the third quarter last year was 15.5%, slowing the same 0.2% on Q2 2008 as the manufacturing sector, and a 0.4% drop on the same period in 2007.

“Generally, service sector profitability remains higher than that of the manufacturing sector, reflecting the more capital-intensive nature of the manufacturing sector,” says the ONS.

Faring a lot better in general are UK continental shelf companies, (those involved in the exploration for, and extraction of, oil and natural gas in the UK). The net rate of return for those companies increased in the third quarter of 2008 to 74.4%, a 3.7% increase on the second quarter of the year and a 35.9% increase on the same time in 2007.

That said, these figures cannot be directly compared to those for the ONS’ reports on profitability of the UK manufacturing and services industries “because of the nature of the capital assets they employ”, says the ONS.