LONDON (Bloomberg) — UK companies' profitability dropped to a three-year low in the fourth quarter as Britain's recession deepened.

The net annual rate of return for non-financial businesses fell to 12.8 percent, the lowest since the final three months of 2005. The rate fell from 13.7 percent in the third quarter, the Office for National Statistics said today in London.

"Non-financial corporate profitability seems certain to fall sharply in 2009 as deep and extended economic contraction, and resultant intensified competition, hits companies' sales," Howard Archer, chief UK economist at HIS Global Insight, said in a note. "Sharply deteriorating profitability is likely to weigh down heavily on investment and employment."

Unemployment rose at the fastest pace since 1971 in February, while a survey by Hay Group Management Ltd. showed yesterday that nine out of ten large companies plan "significant" cost cuts in the next 12 months. Bank of England chief economist Spencer Dale said on March 27 the UK's short- term prospects were "bleak".

Manufacturing companies' net rate of return was 5.3 percent last year, the lowest since 1985, the report showed. The rate of return for services companies was 15.5 percent last year, the lowest level since 1995.