By Mark Cornelius and Kieren Wright of the Bank’s Structural Economic Analysis Division.
This article looks at the performance of companies in 1994 and the first quarter of 1995. Its main points include:
- Company profitability outside the North Sea sector continued to improve rapidly in 1994. But figures for the first quarter of 1995 suggest that nominal profits fell compared with a quarter earlier.
- Industrial and commercial companies’ investment fell in 1994. Investment varied markedly between industrial sectors, however. In the oil and gas and utilities sectors it fell sharply, whereas service-sector and manufacturing investment grew quite strongly. Growth in overall investment has been subdued in this recovery to date, particularly in new buildings. But most economic commentators predict that investment will strengthen this year.
- Spare capacity, uncertainty and the need to restructure balance sheets are possible reasons for companies’ cautious expenditure on fixed assets so far.
- Companies increased stock levels in 1994 and at the beginning of 1995. This may have reflected a mixture of involuntary and voluntary stock building.
- Despite large repayments of bank borrowings by companies, corporate debt has remained at relatively high levels because of continued growth in the stock of other liabilities. But income gearing is low. Recent recourse to bank borrowing may have reflected a number of factors: including the need for working capital, plans to invest and the desire to finance acquisition activity.