UK: US AND UK PROFITS HEAD FOR A FALL AS THE CYCLE TURNS.

UK: US AND UK PROFITS HEAD FOR A FALL AS THE CYCLE TURNS. - Corporate profits growth is poised to slow down in the US and UK, but should recover strongly in Japan next year. This is the conclusion to be drawn from the present state of the profits cycle i

Last Updated: 31 Aug 2010

Corporate profits growth is poised to slow down in the US and UK, but should recover strongly in Japan next year. This is the conclusion to be drawn from the present state of the profits cycle in the various economies. Over the course of an economic cycle the share of profits in GDP fluctuates, falling sharply during a recession but rebounding during the recovery. The US and UK have both seen the profits share rise briskly as economic recovery brought productivity gains, enabling corporate earnings growth to outpace the economy as a whole. However in the US profits have now passed their previous peak as a share of GDP, which indicates that scope for further cyclical productivity gains is becoming limited. The UK is in a similar position with the level of profits and capacity utilisation both approaching previous peaks.

In Japan, by contrast, the profit share is very depressed. Japanese reluctance to shed labour during the downturn caused productivity to decline sharply. Now, led by the fiscal package and a cheaper yen, the economy should begin to recover, producing a rapid improvement in the profit share.

Keith Wade, chief economist at Schroders, argues that, with idle plant and an underemployed workforce, firms can increase output easily, which will bring productivity gains and a rising profit share. For the same reasons there is unlikely to be pressure on wages or inflation, creating the basis for a prolonged spell of growth.

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