Profitability of manufacturing firms fell to its lowest rate since records began in the third quarter of 2011, official data showed, denting hopes for economic growth driven by an industrial revival.
Manufacturers' net rate of return fell to 5 percent between July and September from 6 percent in the previous three months, the Office for National Statistics (ONS) said on Wednesday. That was the weakest since current records started in 1997.
With such poor profitability, the widely-expressed hopes that the low pound will prompt a revival of UK manufacturing are likely to be disappointed, Citi economist Michael Saunders wrote in a note.
Chancellor George Osborne has pinned much hope on a recovery led by manufacturers, saying he wants a Britain carried aloft by the march of the makers, and has put the sector -- which accounts for around 10 percent of national output -- at the centre of his policies.
Manufacturers' returns contrast sharply with those in Britain's dominant service sector, which rose by almost 1 percent to 15.9 percent -- the highest level since the final quarter of 2008.
While some of the gap may be down to the way the ONS calculates profitability, more tangible reasons exist why sales and consulting may be more profitable endeavours in Britain than the business of making, economists say.
Recent rises in commodity prices and turmoil in the euro zone, Britain's main trading partner, have damaged manufacturers' margins, while the pound has not weakened enough to help British exporters compete with Asian rivals.
Britain's huge service sector also holds its own in the global economy thanks to its competitive advantages ranging from the dominance of the English language to the City of London's historical base as a centre for law, accounting and finance.
However, it is not clear that the resilience of services will be enough to pull the economy out of the doldrums.
The net rate of return for all private non-financial companies in the third quarter nudged up to 12.9 percent from 12.8 percent in the second, the ONS said. But economists warn this rate will come under increasing pressure given the economy's struggles.
The worry is that increasing downward pressure on profits may well cause many companies to scale back their investment plans and tighten their labour forces by shedding some workers, Howard Archer, chief economist at IHS Global Insight, said.
Some say this has already begun.
Samuel Tombs, economist at Capital Economics, noted that corporate profits in Britain had been broadly flat or lower over the past few quarters, depending on how they were measured.
One possible explanation is that the rise in the ONS measure of profitability in Q3 may have reflected weak business investment and hence a fall in capital employed by firms, he said.
(Editing by Anna Willard)