Fastest growth in company profits for more than 12 years

Figures from the Office for National Statistics (ONS) showed the fastest growth in company profits for more than a decade.

Driven by strong growth in business and financial services, gross domestic product (GDP) increased above its long-run average in the second quarter of 2007 – prior to the 8% fall in British stock prices over the past 6 weeks.

The economy increased by 0.8% over the quarter and 3% over 12 months, in accordance with a previous forecast.

A spokesperson for Capital Economics commented that the second calculation implies there is plenty of optimism in the real economy to help it deal with any outcome from the financial market crisis. Company profits rose by 4.4% over the quarter and were up by 16.2% compared with the same quarter 12 months ago - the strongest annual rate of growth since the last quarter of 1994.

In comparison, wages were squeezed, with employee compensation increasing by 0.4% in contrast with 0.8% in the previous quarter. In accordance with recent figures showing that industry is having a robust summer, manufacturing production rose by a strong 0.7% over the quarter and construction output was up 1.1%.

With fortunes improving in manufacturing, this helped growth to recover from its overall 0.7% rate set in the first quarter. However, business and financial services remain the energy behind the UK economy.

The statistics have raised the possibility that the Bank of England may still increase interest rates to 6%.

At the beginning of August, the Bank made it apparent in its quarterly Inflation Report that it believed that the ONS figures were underestimating the strength of economic growth. The Bank forecast that rates would possibly have to go up if growth was to return to its trend rate and inflationary pressures be kept in check.

But since then, the seizures in the credit market and the abrupt correction of share prices have provoked most analysts to predict that the Bank will leave rates as they are for the short term.

The GDP figures highlighted the strength of the inflationary threat. The GDP deflator, considered the widest measure of inflation across the whole economy, rose by 3.8% in the second quarter - the highest level since for 11 years.

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