Secret collapse in corporate profits is hurting UK’s recovery
IF you repeat a myth often enough, it eventually becomes the received wisdom. That is as true in the City as it is politics. Take the supposedly well-established “fact” that profits are booming despite the recession. That is certainly the story in America and in emerging markets. But while most large UK-based quoted firms are doing well, thanks to buoyant demand from Asia, the general picture for profits generated in the UK is actually pretty gloomy. In fact, anybody who can be bothered to look up the figures from the Office for National Statistics (ONS) will soon discover that the situation is actually quite horrendous – something which, bizarrely, most commentators have completely missed.
The bounce-back in UK profits in 2009-10 has already been dramatically reversed, with the share of profits by private companies (excluding oil and financial firms) down from 18.2 per cent of GDP in the second quarter of 2007 (prior to the popping of the bubble and subsequent recession) to 14.6 per cent of GDP in the fourth quarter of 2011, if the ONS figures are to be believed. It gets worse: as the excellent Michael Saunders of Citigroup points out, profits account for their lowest share of GDP since 1984. (The definition of profit used here is gross operating surplus). And while profits are recovering in finance, they too remain very weak.
One reason why everybody thinks UK profits are at all-time highs is that in the US, profits as a share of value added for non-financial companies have just hit their highest level since 1969 – with the share of output going to labour in the form of wages at its lowest in decades. The lazy assumption – that this must also be true in the UK – is entirely wrong. As profits have declined, labour’s share of UK GDP has risen from 60.1 per cent at the start of 2008 to 62.9 per cent at the end of last year, well above the 1985-2010 average of 61.7 per cent, according to Citigroup.
That is excellent news in the short-run for all of us in work: we have grabbed a greater share of the pie. But those putting up the capital without which our jobs wouldn’t exist have taken a hit (and of course, millions of workers own shares directly or indirectly) and are now far less inclined to invest and recruit in the UK.
This temporary victory of labour over capital explains why unemployment remains such an appalling problem in Britain: real unit labour costs are up 3.4 per cent since the start of 2008 because productivity has fallen faster than wages. Workers are being priced out of work: real unit labour costs were flat at the same stage of the economic cycle in the 1970s, and had fallen in the 1980s and 1990s. No wonder we are not seeing the jobs boom associated with previous recoveries. At last count, real personal disposable income remained 1.7 per cent higher than before the recession – even though the economy is 4.1 per cent smaller. This cannot last: unless growth recovers very quickly, real wages are going to have to fall.
Collapsing profits are the key reason why firms are not investing more. If they have spare capital, they are better off pulling it out of the UK and investing in an emerging nation. Companies invest and hire for one reason only: to make money. That is why the coalition needs to start freeing up the economy, rather than merely talking about it and then doing the opposite. Unless the UK becomes a more profitable place for firms to conduct business, we will be condemned to years of falling real wages, scandalously high unemployment and economic stagnation. Most UK firms, especially small ones, are hurting. It’s a shame the coalition cannot grasp this.
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