UK drops to fifth place in profits table

The profitability of British business tumbled last year, according to a league table of the major industrialised countries published yesterday. The UK, which was the second most profitable country in 1998, fell to fifth place last year. Manufacturing was even worse, dropping from sixth to 11th place.

The profitability of British business tumbled last year, according to a league table of the major industrialised countries published yesterday. The UK, which was the second most profitable country in 1998, fell to fifth place last year. Manufacturing was even worse, dropping from sixth to 11th place.

The survey provides fresh evidence that UK businesses are under huge competitive pressure. It comes a day after the Department of Trade and Industry said Britain lagged its main rivals in terms of capital investment.

The UK was outperformed by Finland, Singapore, Norway and Israel, according to National Statistics (NS), the government department that collates economic data. NS said the results reflected figures, published earlier this year, showing a fall in the rates of return for the UK corporate sector to a five-year low. While profit margins internationally are being squeezed by price transparency, discounting and intense competition, the UK has suffered more than others.

Richard Walton, a statistician in the national expenditure and income division, said the UK had been hurt by the volatility of the pound's exchange rate.

"The strength of sterling against the euro and the weakness against the dollar raised the costs of raw materials priced in dollars, such as oil ... while cutting margins on the main European export markets," he said.

He also blamed weaker profitability on merger and acquisition activity that was twice the pace of the US. "Greater merger and acquisitions activity to achieve growth has also impacted on margins," he said, adding that this had led to higher borrowing to fund the deals. UK net corporate borrowing rose to £17bn last year, its highest for 10 years, and a further £7bn in the first half of 2000. Within that, a record £39bn was raised by UK firms on the capital markets, topped up by £25bn in the first six months of 2000 "in part a reflection of growing pressure on profits".

Fresh evidence of the competitive pressures came from figures showing the costs of goods leaving the factory gate barely rose last month despite another rise in raw materials costs. Stripping out volatile elements such as oil and food, prices actually fell 0.1 per cent to leave annual inflation at 0.8 per cent - the lowest for eight months. Input prices rose 0.5 per cent on the month, slightly lower than expectations, to be 10.8 per cent higher than a year earlier, the lowest since April.