Business profits set to stumble in wake of EU referendum

Jake Cordell
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City of London
Business profits are set to be sqeezed following the EU referendum (Source: Getty)

Corporate profitability held up in the three months before the EU referendum, new statistics have revealed, as companies showed little sign uncertainty was weighing on their ability to generate cash.

The Office for National Statistics (ONS) said this morning profitability of private sector non-financial corporations, as measured by their net rate of return was 12.2 per cent in the second quarter, in line with the 12.3 per cent recorded in the first three months of the year.

Services firms remained more profitable than manufacturers, although the gap narrowed over the period. Services companies returned 18p in profit for every £1 of capital used, down slightly, while manufacturers returned 13.6p, up five per cent.

However, economists warned companies could see their cash squeezed over the coming months as a result of the fallout from the EU referendum.

Businesses are already seeing prices for imported goods jump as a result of the falling pound. The producer prices index (PPI), which measures inflation for manufacturers jumped to a five-year high of 7.6 per cent last month. As the Unilever-Tesco debacle shows, when it comes to passing on these costs to consumers it is not straight forward.

Howard Archer, chief economist at IHS Markit said: "Corporate profitability looks certain to be increasingly pressurised by a double whammy of markedly rising input prices and weakening UK economic growth.

"Consumers are likely to face less favourable purchasing power as inflation rises and earnings growth is limited by companies striving to limit their costs."

Archer added this cycle could exacerbate and prolong a period of weak growth as the UK hunkers down for negotiations over how to exit the EU: "Any marked weakening in UK corporate profitability over the coming quarters would threaten to weigh down on business investment, which would be detrimental to hopes of improving UK productivity."

Returns for the UK's struggling North Sea oil and gas firms hit a record low of just 0.6 per cent in the second quarter of the year, as the weak oil price continues to hit profits for the industry.

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