Fears for economic momentum in profit warning report

Yorkshire and North East quoted companies issued nine profit warnings between April and June this year, according to EY’s latest Profit Warnings report released today.

It is down slightly on the ten profit warnings issued in the first quarter, taking the total issued during the first half of 2019 to 19. The same number of warnings were issued by Yorkshire and North East businesses in the first half of last year.
On the day of warning, the average share price fall for Yorkshire and North East companies in H1 2019 was 26.5%, compared to 20.8% across the UK, and higher than the average level recorded during the financial crisis. (Yorkshire & North East 2008: 20%)

A total of 69 profit warnings were issued across the UK in the second quarter – up 19% year-on-year – representing the highest second quarter total since 2008. Almost one in five listed companies blamed Brexit as a contributory factor.

Hunter Kelly, EY’s head of restructuring for Yorkshire and the North East, said: “There is now clear evidence that prolonged Brexit uncertainty has created a hiatus in business activity, with companies scaling back on expenditure and investment, which is making it difficult to forecast and plan with any certainty.

“The economic impact of this is spreading across a broad range of sectors.

“However, Brexit is not the only factor and the slowing global growth and fluctuations in trade and geopolitical tensions between the US and China are adding further unpredictability for the second half of 2019.

“Profit warnings issued by Yorkshire and North East companies were spread evenly across a range of different sectors – from chemicals to leisure to financial services – and this partly reflects the spread of industries and sectors we have in the region, as well the fact that the challenges faced span multiple sectors.”

The FTSE sectors issuing the most warnings in quarter two across the UK were General Retailers (10), Chemicals (6), Construction & Materials (6), Financial Services (6) and Support Services (6). In the last year, 14 FTSE sectors recorded Brexit-related profit warnings, five of which were added in the second quarter of 2019.

According to EY’s report, while the UK economy grew by a better than expected 0.5% in quarter one of 2019, it is likely to have suffered a mild contraction in the second quarter. Retail sales suggest that UK households still have the urge to spend, but don’t have the confidence or means to buy at will.

Kelly added: “Consumer spending has been surprisingly resilient until now, but sales of discretionary and high-value purchases – such as cars – are coming under particular pressure as confidence slips.

“There are signs that the spring sunshine brought consumer spending forward, but weather-related retail sales have lost momentum in quarter two.

“Most consumer businesses will now be focused on the all-important final ‘golden quarter’. Profit warnings from retailers usually drop over the summer, but this is unlikely to be a normal third quarter, and the usual patterns of warning could be turned upside down.”

Combined with the profit warning data, EY says the latest industry surveys suggest the UK is experiencing a sea-change in its economy as it faces increasing uncertainties.

EY ITEM Club has maintained its 2019 UK GDP growth projections of 1.3% for 2019 and 1.5% for 2020, if the UK leaves the EU with a deal on 31 October 2019. But, in common with other forecasters, they predict a mild recession under a “no-deal” scenario – a 40% probability in their assessment.

Kelly concluded: “If the UK leaves the EU without a deal and GDP growth falls to just 0.2% – as predicted by EY ITEM Club – we expect to see increased profit warnings from companies.

“Warnings would certainly increase in sectors with exposure to import and export disruption, including food producers and food retailers, where profit warnings are currently low.”

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