UK Companies see Surging Profitability, Yet Pay Growth Remains Stagnant

UK economy workers

Some good news on the corporate front with the ONS reporting the the profitability of UK companies has increased dramatically in the January to March 2017 period.

The profitability of private non-financial corporations (PNFCs), as measured by their net rate of return, increased to 12.7% for Quarter 1 (Jan to Mar) 2017, compared with 12.4% in Quarter 4 (Oct to Dec) 2016.

The profitability of companies engaging in oil and gas exploration on the UK continental shelf (UKCS) increased to 4.2% in Quarter 1 2017 from 3.9% in Quarter 4 2016.

The profitability of manufacturing companies increased to 14.0% in Quarter 1 2017, the highest since Quarter 2 2014.

The profitability of services companies increased to 17.9% in Quarter 1 2017, from 17.7% in Quarter 4 2016.

This rise in profitability comes at a time of slowing economic momentum and lacklustre wage growth.

We find this instructive. Wage growth continues to expand at about 2%, well below the rate of inflation.

Wage increases for May stood at 2.0%.

The Bank of England continues to dwell on the fact that wage growth remains underwhelming and below long-term averages despite the economic recovery and high employment rate.

It would appear companies are happy to sit on their profits!

So there will not likely be any serious interest rate raising regime - which are supportive for Sterling in the long-run - until wages see a material rise.

The profitability v labour investment dynamic would support data that shows UK businesses are content to sit on their huge cash piles, just waiting for the right time to invest.

The real UK economic recovery will come when those cash piles are invested in growth - labour included.

We suspect that only when the Brexit situation becomes clearer will companies be able to make this call.