Profit warnings hit seven-year high

Monday 14th July 2008

UK profit warnings rose 11 per cent compared with last year in the second quarter of 2008.

The levels of profit warning are now at their highest since 2001, as the credit crunch spreads beyond the financial services sector, new analysis from Ernst & Young reveals.

In total 98 firms issued profit warnings and 15 announced the need to lower expectations if conditions did not improve.

Keith McGregor, restructuring partner at Ernst & Young, said: “After a pivotal quarter, it is clear that the ripples from the credit crunch have spread far beyond the financial sphere.

"Most of the 26 per cent of companies warning this quarter blaming the credit crunch for their woes came from outside the financial sector."

He added: "These are uncertain and challenging times for UK plc."

The Ernst & Young report points to housebuilders particularly suffering, with market confidence are levels not seen by even experienced firms.

"The spate of redundancies announced by house builders in the last week are clearly aimed at executing a strategy of mothballing their businesses and land banks until the market recovers," Andrew Wollaston, restructuring partner at Ernst & Young, said.

"How long the recovery will take, is difficult to call. In the last property downturn of 1989, the average value of UK houses fell for six years to 1995 and then recovered to 1989 values in 1997."

Falling consumer spending is also expected to start hit the economy, and further warnings are expected from the retail sector.

“Retailers may continue to drive sales volumes throughout the summer using heavy discounting, but many retailers have already realised that the vanity of keeping top line like-for-like sales buoyant at all costs can have crippling effects on profits," Mr Wollaston said.

"Retailers will need more than good weather to compensate for consumer headwinds and their own rising costs and we expect the high level of profit warnings and business failures to continue."

Mr McGregor explained the scale of the slowdown was hard to predict but the economy could be at "the end of the beginning".

"This still has a long way to play out. At best, flat line growth is a certainty, at worst, recession a real possibility. Businesses and consumers, many of which have not experienced either, will feel the harsh reality," he concluded.

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