Business profit

Inclusive of a 0.9 percentage point year-on-year increase in the current year, business profit is expected to be unchanged by 0.0 percentage points in 2023-24 (10.1%) against the average net rate of return on capital employed in 2018-19 (10.1%). Prior to the five-year period, in 2014-15, the average net rate of return on capital employed increased by 0.7 percentage points to 12% - this was the highest average rate across a given financial year since 1997-1998 - on the back of marked domestic economic recovery which, in turn, facilitated protuberant growth in the services sector in particular. However, business profitability across the UK economy has since slid. Offsetting any gains from the then-indicatively growing manufacturing and services sectors, the oil price crash, whereby a global supply glut led to the longest lasting price crash since the supply-driven collapse in 1986, precipitously slashed UK Continental Shelf (UKCS) companies' bottom lines - with oil prices bottoming out in early-2016, the ability of UKCS companies to turn a profit was hampered, which exerted an increasing drag on profitability in the wider UK economy.

While oil prices rose notably between 2016 and 2018, which in turn supported UKCS companies' profit margins, the profitability of UK PNFCs came under pressure, most notably from what companies identified as Brexit-related impetuses and Brexit-related shortfalls in earnings. Coupled with rising operating costs across the UK economy, which, to a certain extent, have been compounded by an above-target rate of inflation for a significant proportion of the past four-year period, Brexit-related to a more recent extend coronavirus-related uncertainties, have accelerated pressure on the net rate of return on capital employed by way of challenging market conditions. For instance, since the EU referendum, depleted big-ticket investment in key sectors (e.g. construction and manufacturing), as decision makers delay expenditure plans; contingency planning for life after the European Union; supply chain disruption; exchange rate-driven input price inflation; abnormal demand trends; and so forth, have all contributed to pressure on PNFC's expected yield on output.

With regards to the outbreak of COVID-19 (coronavirus), the spread increased uncertainty throughout the world and the United Kingdom and ultimately accelerated existing pressure on the net rate of return on capital employed by way of challenging market conditions. First identified in December 2019, in Wuhan, Hubei province China, the coronavirus disrupted supply chains, currency markets, stock markets, commodity markets, consumer demand and business activity. The coronavirus outbreak also led to nationwide containment efforts which resulted in people working from home or self-isolation across the United Kingdom and the world. While the Bank of England responded to outbreak with an emergency cut to the official bank rate, taking borrowing costs back down to the lowest level in history and the government have introduced an array of measures such as the Coronavirus Business Interruption Loan Scheme (CBILS), the underlying affects from the coronavirus previously mentioned have all contributed to pressure on PNFC's expected yield on output. Consequently, business profit declined for five consecutive years through 2020-21, including a 0.4 percentage point contraction in 2020-21. These coronavirus complications began to subside through 2021-22. This was facilitated through the reopening of the domestic and global economy, which has been made possible through the reduction in severe coronavirus cases and deaths through the rollout of the COVID-19 vaccines.

Furthermore, as of 11pm on 31 January 2020, the United Kingdom left the European Union and agreed upon a withdrawal deal in December 2020. PNFC profitability therefore improved during 2021-22, combined with the observation that the significantly damaging effects of the coronavirus such as nationwide lockdowns and stay at home measure dissipated. Hence, business profit rose for the first time in six years in 2021-22, increasing by 0.5 percentage points. Over the current year, this trend is expected to continue with IBISWorld estimating that business profit will rise by 3.3 percentage points in 2022-23, so that the average net rate of return on capital employed will reach 9.4%.