User Name: Password:      Register - Lost password?

Forex News Blog
Back to The Headlines
Monday October 9, 2006 - 11:37:09 GMT
Lloyds TSB Financial Markets -

Share This Story:
| | Email

Economics Weekly

Economics Weekly: UK company profitability hits a record level - what are some of the reasons and consequences?

Figures for UK corporate profitability in the second quarter of 2006 showed that it has reached a record rate. There has been a sharp rise in company profitability in all of the major economies. But the UK report also showed that there was a sharp divergence in performance between different types of companies. We look at the data and ask what it means for default rates, bond spreads (relative to government bonds or, in the jargon, risk free assets), and hence the implications for credit ratings and other measures of company default risk.

Service companies are seeing the strongest gain in profitability in the UK, as manufacturing suffers from a low global export share
The net rate of return on capital employed by UK companies rose to 14.7% in Q2 2006, up from 14.4% in Q1. The details of the data show that services companies accounted for the bulk of the rise in the overall rate of net return, with an increase from 19.5% in Q1 to 20.1% in Q2, see chart a. But the rate of return for manufacturing firms fell to 6.1% from 6.8% in Q1 and 10.7% in the year before, as weak domestic demand hit them badly and they failed to benefit from fast growth in the emerging market economies. North Sea oil companies rate of return remains in the 30s, due to high oil prices, with only a modest fall back in recent quarters. But manufacturing growth is now recovering, boosted by a pick up in the key EU markets, and so should profitability in the quarters ahead. Services companies’ output growth has remained strong in the last few years and that explains good profitability in the context of low domestic interest rates and increased output from legal and accountancy based firms.

Is globalisation a factor driving profits share higher?
One of the consequences of globalisation is that there is greater capital and labour mobility across national frontiers, as evidenced by increasing weightings of exports and imports in national income, increased foreign ownership of domestic companies in stock markets and greater foreign direct investment as a share of total investment. The clear implication of this is that pay growth should slow and profit growth is either maintained or accelerates. The reason is that a greater supply of labour should bear down on wage inflation in any relatively free market whereas companies should have a greater ability to control other costs through outsourcing, efficiency gains and from slower wage inflation.

In the UK, low inflation and low interest rates have driven economic growth and so boosted company profitability
Lower interest rates in the last decade have also helped company profitability to improve through a reduction in interest payments on debt and from a retirement of higher interest rate debt and replacement with lower interest rate debt. Chart b shows that there is a strong link between lower short term The UK is not unique in seeing a sharp rise in profitability, perhaps helped by globalisation, but certainly by lower interest rates and rising labour supply. What does this trend mean for company debt ratings and corporate spreads?

Bond spreads have narrowed, but could widen as investment picks up and interest rates rise

UK corporate spreads have narrowed, as a result of lower interest rates and inflation but also due to improved corporate ratings as debt defaults have fallen and gearing ratios have improved. The UK economy is now seeing faster growth, which we think will keep down default rates in the years ahead, see chart c. However, interest rates are likely to rise further and that will put pressure on spreads. Moreover, with economic recovery is likely to come a rise in business investment. That too could push up gearing rates and so widen spreads as ratings are adjusted to reflect a higher liability risk profile.

Overall UK company balance sheets look likely to remain strong
Our conclusion is that low interest rates lead to faster economic growth and together they help firms' profitability and balance sheets to improve. Faster economic growth leads to lower company insolvencies, see chart d, and that will be the key factor keeping down default rates in the next few years in the UK. Economic growth is forecast to be 2.7% this year and 2¾% in 2007 and 2008. But higher interest rates and increased investment should lead to wider corporate spreads. In terms of profits and economic growth, the UK looks in very good shape. In other words, UK bonds look an attractive bet compared with other markets, see chart g, in a global context of rising interest rates and somewhat weaker growth.

Commentary on economic data in the week

Strong US labour market data to force market re-assessment of interest rates

• Unless US GDP growth slows enough to force a drop in core inflation, we believe that US interest rates could rise in Q1 2007, not fall as financial markets are predicting.
• The ECB stays tough on interest rates, even though CPI inflation is slowing. Average eurozone economic growth of 2.5% this year will be strong enough to support higher rates and another 25bp rise to 3.5% in December is a strong possibility.

• A 25bp increase in UK base rates to 5% at the Bank of England’s interest rate setting meeting on 9 November is now virtually a 'done deal' in our opinion, due to the booming housing market, growth in manufacturing and above target price inflation.

• The Bank of Japan will leave interest rates at 0.25% at its rate setting meeting on Friday, as the evidence for inflation is not yet substantial enough to increase them.

Friday’s US labour market data were strong, lessening the prospect of an early cut in interest rates and triggering a rise in the dollar to levels close to $1.25 against the euro as well as increased bond yields. As a result, financial markets reduced their pricing of a cut in US interest rates in Q1 2007 from a probability of 50% to 30%. The data showed that the US economy created an average of 120,000 jobs each month in August and September, with wage growth of 4% in September, an eight year high. The unemployment rate fell from 4.7% in August to 4.6% in September. Our story line goes that strong wage growth and lower unemployment, combined with falling energy prices, could support economic activity in coming months, absorbing some of the headwinds from the weaker property market and leading the US to a soft landing. At the same time, the Fed is clearly concerned about serious inflation risk. In our opinion, unless US GDP growth slows enough to force a drop in core inflation, which rose to 2.5% in August from 2.3% in July, we believe that the Fed will raise US interest rates by a further 25bp in Q1, otherwise it could risk losing credibility. Bear in mind that low inflation is the best way of ensuring steady economic growth. Data this week includes, on Wednesday, the publication of Fed minutes of its 20 September interest rate setting meeting, which will be closely read for further information on the growth and inflation debate. On Thursday, the Beige book will be scrutinised for economic development across the US. Trade data are also published on Thursday – we expect a slight reduction in the deficit to $67bn in August from $68bn in July. Ending the week on Friday, key US consumer data are released, including the University of Michigan consumer confidence data for October and retail sales for September – we expect little monthly change in both.

In the UK, we believe that a 25bp rise in UK interest rates at the Bank of England’s interest rate setting meeting in November is now virtually a done deal. The MPC chose to play the waiting game last week, as members awaited the November Quarterly Inflation report before making up their minds. But whether they needed to is another question. The evidence to justify a move was there for all to see - rising house prices, growth in manufacturing and the likelihood that CPI inflation will be close to 3% in November, the top end of the Bank of England’s target range. The additional risk is that above target inflation may spill over into average earnings growth, making inflation more difficult to manage in future. On Monday, the UK sees the publication of probably lower UK producer prices for September, but this should not preclude the MPC from raising interest rates. UK trade data should show some slight improvement from a deficit of £6.3bn in July to £6.2bn in August, released on Tuesday.

Last week’s ECB interest rate setting meeting showed that members remain tough on interest rates, by hiking 25bp to 3.25%, even though CPI inflation is decelerating. In ECB President Trichet’s accompanying press statement, he refrained from using the word ‘vigilance’, which has been understood to mean that interest rates will be increased next month. However, eurozone growth of 2.5% this year is strong enough to support higher rates and another 25bp rise to 3.5% is a strong possibility in December. In fact, ECB members may see it as a necessary pre-emptive strike.

On Wednesday, eurozone Q2 GDP growth should be confirmed at 2.6% and on Thursday the final German CPI figure for September will come in sharply lower at 1% compared with 1.7% in August.

interest rates and a rise in profitability, with falling rates boosting profitability with a lag. This is reflected in a fall in capital gearing ratios - although a reluctance to invest by companies in the UK has also contributed to a fall in gearing rates, including interest income, as companies have retired debt but have not issued equivalent new debt to match

Trevor Williams, Chief Economist
[email protected]
Lloyds TSB Bank,
Financial Markets
Faryners House,
25 Monument,
London EC3R 8BQ
0207 283 - 1000

Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.


Forex Trading News

Forex Research

Daily Forex Market News
Forex news reports can be found on the forex research headlines page below. Here you will find real-time forex market news reports provided by respected contributors of currency trading information. Daily forex market news, weekly forex research and monthly forex news features can be found here.

Forex News
Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."

Actionable trading levels delivered to YOUR charts in real-time.

Register To Test Your Amazing Trader

GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Tue 31 July 2018
AA JP- Bank of Japan
A 06:00 DE- Retail Sales
A 09:00 EZ- flash HICP/GDP
AA 12:30 US- Core PCE Deflator
A 14:00 US- CB Consumer Confidence
Wed 1 Aug 2018
A Final Mfg PMIs
AA 12:15 US- ADP Private Payrolls
A 15:00 US- EIA Crude
AA 18:00 US- Federal Reserve Decision
Thu 2 Aug 2018
AA 11:00 GB- Bank of England Decision
A 13:30 US- Weekly Jobless
Fri 3 Aug 2018
A Final Services PMIs
AA 12:30 US- Employment
A 12:30 US/CA- Trade

John M. Bland, MBA
co-founding Partner,

Global-View Affiliate Program

We are starting an affiliate program to market some of our products.

Send me an email if you would be interested or if you know someone who would like to be an affiliate. Generous commissions payout for those accepted.

Put the word "affiliate" in the email subject line.

Contact us

Start trading with forex broker Markets Cube

Max McKegg's Daily Forex Trading Forecasts

Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.

Request a TRIAL of Max's Forex Service.


Retail Forex Brokerage Changing!

Are you looking for your first broker or do you need of a new one? There are more critical things to consider than you might have thought.

We were trading long before there were online brokers. Global-View has been directly involved with the industry since its infancy. We've seen everything and are up-to-data with recent regulatory changes.

Our Best Brokers listing section includes:Forex Broker Reviews, Forex Broker Directory, Forex Broker Comparisons and advice on How to Choose a Forex Broker

If would like guidance, advice, or have any concerns at all ASK US. We are here to help you.

SEE Our Best Brokers List

Currency Trading Tools

  • Live rates, currency news, fx charts. 

  • Research reports and currency forecasts.

  • Foreign Exchange database and history.

  • Weekly economic calendar.

Directory of  Forex trading tools

Terms of Use    Disclaimer    Privacy Policy    Contact    Site Map

Forex Forum
Forex Trading Forum
Forex Forum + forex rates
Forex Forum Archives
Forex Forum RSS
Free Registration

Trading Forums
Currency Forum Guide
Forum Directory
Open Forum
Futures Forum
Political Forum
Forex Brokers
Compare Forex Brokers
Forex Broker News
Forex Broker Hotline

Online Forex Trading
Forex Trading Tools
Currency Trading Tools
Forex Database
FX Chart Points
Risk/Carry Trade Chart Points
Economic Calendar
Quicklinks to Economic Data
Currency Futures Swaps
Fibonacci Calculator
Currency Futures Calculator

Forex Education
Forex Learning Center
FX Trading Basics Course
Forex Trading Course
Forex Trading Handbook

Forex Analysis
Forex Forecasts
Interest Rate Forecasts
Central Bank Forecasts

FX Charts and Quotes
Live FX Rates
Live Global Market Quotes
Live Forex Charts
US Dollar Index Chart
Global Chart Gallery
Daily Market Tracker
Forex News
Forex Blog
Forex News
Forex Blog Archives
Forex News RSS
Forex Services
Forex Products
GVI Forex
Free Trials
FX Bookstore
FX Jobs and Careers
Jobs USA
Jobs UK
Jobs Canada

Forex Forum

The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.

Forex News

The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.

Currency Trading

Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by

Forex Brokers

The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.

Forex Trading

Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.

FX Trading

Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.

Forex Blog also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.



By using this website, you are agreeing to our Privacy Policy and Terms of Use, and Cookie Policy

Copyright ©1996-2014 Global-View. All Rights Reserved.
Hosting and Development by Blue 105