By Kieren Wright of the Bank’s Structural Economic Analysis Division.
As the recovery has become more firmly founded, the financial position of industrial and commercial companies (ICCs) has strengthened. This article compares the present recovery with that of 1982–84, and examines in detail how firms have performed in 1993 and the first quarter of 1994. The main points include:
- Profitability is at a markedly higher level than at a similar stage in previous recoveries. In the first quarter of 1994, the pre-tax return on capital in the non North Sea sector increased to 9.5% from a trough of 6.3% in the first quarter of 1992. This return on capital is almost double that at the equivalent stage in the previous recovery.
- ICCs’ retained earnings increased by over a third in 1993, when firms made unprecedented net repayments of bank debt. ICCs’ net repayments to banks were equivalent to 1.8% of GDP in 1993, compared with total net borrowing equal to 2.4% of GDP in 1982, the comparable year in the last recovery.
- At the same time, firms have increasingly used the capital markets as a source of external finance. Gross capital issues by ICCs increased by 51% to £23.9 billion in 1993, representing 30.3% of total ICCs’ funding.
- ICCs’ dividend payments—which have been historically high since the mid-1980s—have grown further in the recovery; they increased 9.3% to £22.7 billion in 1993. But many firms with relatively weak profitability and high indebtedness have chosen to cut or pay no dividends in the recent cycle.
- Fixed investment has been higher as a share of GDP than in the previous recovery. This reflects a higher starting level of investment at the end of the recession; but to date, investment has not risen further as the recovery has picked up.