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Recovery woes as leading sectors' profitability falls

By Peter Cripps

Published 07/07/2011

The profitability of the services and manufacturing sectors fell in the first quarter of 2011, adding to worries about the strength of the UK's economic recovery.

The manufacturing sector saw its net rate of return fall to 6.1% in the quarter, its lowest in a year, according to the Office for National Statistics.

Profitability in the services sector fell to 14.9%, slowing from 15.2% in the final quarter of 2010.

Bryan Gray, the head of industry group Northern Ireland Manufacturing, said manufacturing in the province continued to face difficulties, with jobs down 7,000 in the last year, including a slight fall in the last quarter.

"Now more than ever, our local manufacturing sector needs some good news to provide some much needed hope for the future," he said. "The present campaign to reduce corporation tax is what many are pinning their hopes on."

He said Northern Ireland companies were also paying a premium for commercial electricity compared to their counterparts across the border.

According to the ONS, the overall profitability of UK companies outside the financial sector rose in the quarter to 12.7% - the highest level since the fourth quarter of 2008 - as oil and gas explorers benefited from the rising price of oil.

Oil prices hit a 32-month high in April as the crisis in Libya caused supply disruption. This helped oil and gas exploration companies' profitability increase to 47.6%, its highest level since the third quarter of 2008 when oil prices peaked at $147 a barrel.

But manufacturers saw their net rate of return retreat sharply from the 11.2% seen in the fourth quarter of 2010.

Companies in the services sector, which accounts for more than three-quarters of gross domestic product, saw growth slip backwards from the final quarter of 2010 and are still well below pre-recession levels.

Howard Archer, chief economist at IHS Global Insight, said: "Manufacturers enjoyed a decent 2010 but activity seems to have lost significant momentum overall recently and their margins are being squeezed by elevated input costs."

Excluding the offshore energy operations, UK non-financial companies, which includes services, manufacturing, construction and electricity supply, saw their profitability hit 11.3% in the quarter.

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