THE region's businesses have seen their profitability cut by nearly a third in the past 18 months.

That's according to the latest Corporate Health Check from business information group Experian.

The report shows that the average return on capital fell from 13.62 to 12.53 per cent in the last quarter, to September 2002.

That compares with a national decline from 7.57 per cent to 6.98 per cent.

Only companies in parts of Yorkshire and the East Midlands were more profitable in the third quarter of 2002. And only Yorkshire is more profitable now than it was in the same period of 2001.

Profitability in all but one of the 24 industries studied, the oil industry, has fallen over the past four years.

Nineteen sectors are down from their peak by over a third and the worst, including IT, the media, telecommunications and engineering, are more than two thirds down.

Peter Brooker, who compiled the report, said: "Apart from a brief recovery in 2000, profitability among companies in the North-East has fallen continuously since the end of 1998.

"There was a small recovery, with profitability peaking in early 2001, but since then it has fallen back by almost a third in 18 months. The latest decline in profitability coincides with a further drop in business confidence across almost all of the UK.

"Part of the reason lies in substantially higher costs for business, mostly from new legislation, which has been further increased with the rise in employers national Insurance contributions.

"Low capital investment is also a factor, depressing profitability to such an extent that it threatens the long-term viability of many companies.

"This makes businesses more vulnerable.

"Business failures in 2002 rose by almost ten per sent to nearly 19,000."

Looking ahead, Mr Brooker said: "The economic outlook has changed considerably since the third quarter of last year.

"Since then, the war with Iraq has begun and its prosecution will affect consumer confidence, particularly if casualties begin to mount.

"Whether consumers will have the confidence to prop up the economy is debatable, particularly as they will see the effect of the largest direct tax rises (National Insurance) since the Government came to power."