Profitability in Britain's dominant services sector fell to its lowest level since 2013 in the second quarter despite growth in overall output, according to figures released today.
The net rate of return for services companies – profit as a percentage of the capital used in production – fell from 18.6 per cent in the first quarter to 16.5 per cent in the three months to June, the Office for National Statistics (ONS) reported today.
In contrast, profit margins in the manufacturing sector held steady at 15.3 per cent, in spite of an output fall during the quarter.
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Profitability in the manufacturing sector has increased dramatically over the past two years, but in the much larger services sector it has declined from heights of 22.6 per cent in 2015. The services sector accounts for the vast majority – almost 80 per cent – of UK annual output.
The fall in profitability in services sector firms coincided with the rapid rise in inflation spurred by the fall in the value of sterling following the vote to leave the EU.
In many cases that forced firms to choose between passing on price rises to customers and risk falling demand, or absorb the increased costs in their profit margins to preserve market share.
Overall profits among private non-financial corporations fell during the quarter from 12.9 per cent to 12.6 per cent. The fall in profitability came despite GDP growth during that period of 0.3 per cent.