A difficult future for UK profits was predicted by Sir Clive Thompson, chief executive of Rentokil Initial and a former president of the CBI. Presenting the annual AIRMIC lecture in London, he said that, although forecasters were optimistic about the long-term outlook for the world economy, the same did not necessarily apply to profits.
“We are in a sort of Goldilocks scenario where after years of boom and bust we have the perfect combination: not too hot and not too cold. But a good story must always have a twist in the tail, and I suspect this may be no exception.
Sir Clive said that the UK economy was strong, with growth of 3% last year, predicted growth of 2.6% this year and inflation under control. At the same time, the IT revolution was likely to bring big improvements in productivity. “So what’s the problem?” he asked. “Companies face a serious squeeze on profit margins. The Bank of England has warned of a risk to corporate robustness. There is enormous pressure to cut prices, and companies face escalating competition from overseas.
He warned traditional companies against moving too quickly from ‘bricks to clicks’. “Losses are not confined to the IT sector. More and more old economy companies have abandoned caution when faced with the word internet. The internet drives down prices to the point where business-to-consumer companies are unprofitable.
Sir Clive said that the UK economy had shown an astonishing capacity to create employment over the last eight years, with unemployment falling from 2.96m in 1992 to just over one million now. But if unemployment continued to decline, it was inevitable that labour costs would increase.