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UK plc rides out the storm

Created:

2 July 2009

Written by:

Chris Dillow

Yesterday's official figures (pdf) show something quite remarkable - that corporate profits are holding up well. In the first quarter, non-oil non-financial companies made a net return on capital of 11.4 per cent. Although this is down from the cyclical peak of 13.7 per cent posted back in the fourth quarter 2006, it's a better return than firms made during the recession of 1990-92 or even the mild downturn of 2001-02. And it's much better than in the 70s and early 80s.

What we're seeing here, then, is the same as in the US - the greatest financial calamity since the 30s has had relatively little impact upon non-financial profits.

One reason for this is that non-financial firms did not enter this downturn having over-invested in capital. This crisis is a tale of over-accumulation of financial "assets" not real ones. Another reason, of course, is that firms have passed on the pain of recession to workers, in the form of higher unemployment.

And herein lies an important point. One of the key developments of recent years - the shift in the balance of power from workers to capitalists*, facilitated in great part by the massive supply of cheap labour in China and India - is still intact.

This doesn't mean profits will grow from now on; As Deloitte's Roger Bootle points out, cyclical economic weakness could continue to drag them down for a while yet. But it does mean that, on a long-term perspective, profits are healthy, and might remain relatively so.

It's easy to forget that capitalism isn't merely about financial bets. It's also about making goods and services. And this huge aspect of capitalism is still healthy.

* I won't apologize for using such Marxist terminology! You can only understand aggregate profits within a sort of Marxist framework; Keynesianism and conventional neoclassical economists have always had a bit of a blind spot about them.