By Claire West

Global businesses are fearful of their ability to improve profitability over the next 12 months, according to KPMG’s latest Global Business Outlook study.

Conducted among 6,200 manufacturers and service providers across 17 major economies worldwide, the study reveals firms’ fears over their inability to increase the prices they charge, against a backdrop of rising or static input costs.

According to British businesses, the resulting squeeze on margins will be markedly worse for UK firms than the rest of the world, the research also suggests.

The Big Squeeze

The overwhelming majority (88%) of service firms around the world expect input costs to increase, or at best remain static, over the coming year. The cost outlook is almost as bleak among manufacturers, with 82% anticipating a rise or no change in input expenditure, and close to half (45%) predict increasing input costs; as do almost a third (30%) of firms in the services sector.

In stark contrast, just one fifth (20%) of services firms, and less than a third (32%) of manufacturers, expect to be able to command higher prices this time next year for their goods and services.

Martin Scott, Partner at KPMG Performance and Technology, commented: “In profitability terms, the majority of firms will be in no better position next year — indeed, many are predicting margins to contract.

“Raw material price hikes, competitive pressures, mounting energy costs and rising inflation are all cited as contributing factors to an increasing global cost of production.

“Without the ability to pass escalating costs on to customers, firms will struggle to grow profits over the coming year, raising serious doubts over sustained economic recovery.”

UK Pessimism

UK businesses are even more pessimistic on input costs and output prices than their overseas counterparts, according to the KPMG study.

Approaching half (46%) of British services firms anticipate a rise in input costs over the next year, more than 50% higher than the global average of 30%.

Among UK manufacturers, nearly two thirds (63%) expect rising input costs, 40% higher than the global average of 45%.

Martin Scott, commented: “As public spending cuts hit home and the prospect of a double dip recession looms, UK businesses are markedly more downbeat on the prospects for profit margins for the next 12 months than the rest of the world.

Facing pressure on margins, firms in the UK and globally must continue to manage costs tightly, while identifying fundamental changes to their operating models to drive further efficiencies.

“They will also need to explore innovative pricing and bundling strategies to increase share of wallet, and we expect to see multi-nationals accelerating their push into emerging markets.”