Business profits and the recession

In previous economic recessions in Britain, the profits of businesses large and small have taken a big hit and have contributed to sizeable and damaging cut-backs in employment.

One of the interesting features of the most recent downturn (in which GDP has fallen by more than 6 per cent) is that corporate profitability has been resilient in the face of a contracting economy.

Yes there have been many high profile causalities notably in retailing and financial services. But the overall picture is that profits have stayed quite high. There are appear to be several reasons

(1) Lower interest rates - policy interest rates have been slashed to less than one per cent and, while this is largelt irrelevant to most businesses who pay a hefty premium above the base rate, the cost of financing for many borrowers has dipped compared to 207-08

(2) Quick action to control costs - many businesses were very quick off the mark in reducing inventories of finished products, raw materials and semi-finished goods once it became clear that this recession would bite hard. The monthly number of redundancies soared reaching over 10,000 per day in March 2009.

(3) A cheaper pound: The twenty per cent depreciation of sterling against most major currencies has given export businesses an opportunity to widen their profit margins. They have kept their export prices unchanged and simply taken a better margin on each sale.

These profits provide a useful cushion for a fragile business sector as we step tentatively into the recovery.