Economic waters murky despite profit warnings drop

YORKSHIRE businesses could face economic “post election blues” despite a reduction in the number of profit warnings issued by regional quoted companies, according to research from accountancy firm Ernst & Young.

Six profit warnings were issued by quoted companies in Yorkshire and the North East during the first quarter of 2010 compared to 19 in the same quarter of 2009, a year-on-year fall of 68%.

However, Hunter Kelly, Yorkshire restructuring partner at Ernst & Young, said: “Despite this low level of profit warnings, we continue to question the real strength of the recovery and economy, once the significant props of government spending and effects of quantitative easing fall away. I fear that the UK economy will face some post election blues.”

Mr Kelly told TheBusinessDesk.com that he believes businesses will continue to struggle during the downturn.

Although he doesn’t envisage a ‘double tip’ in the economy, as many commentators have suggested, Mr Kelly believes conditions will remain “stagnant” and will “flat-line” for the remainder of 2010.

The number of profit warnings issued between January and March in Yorkshire remained on a par with the fourth quarter of 2009, when there were five, but were well below the region’s four year average of nine.

The sectors hit in Yorkshire and the North East over the first quarter were support services (three); industrial engineering (one); healthcare, equipment and services (one); and mining (one).

Mr Kelly added: “Almost a quarter of all UK support services companies have warned in the past year, reflecting the difficulties experienced by these companies reliant on discretionary budgets, whose customers are still preserving cash by investing and spending less.”

The Yorkshire region followed the national trend, according to Ernst & Young.

There were 54 profit warnings issued by UK quoted companies during the first quarter of 2010 compared to 117 over the same quarter of 2009, a year-on-year fall of 54%. The figure represents the lowest number of first quarter profit warnings in 10 years.

UK consumer sectors were absent from the profit warning data, with the FTSE general retailer sector issuing four profit warnings compared to the eight issued in the first quarter of 2009.

Mr Kelly added: “We could extrapolate from these figures further evidence that the recession has been much easier than expected on consumer facing companies – and it is true that consumer spending has held up remarkably well.

“But it is also worth noting the large caveat to these figures: the incredible 33% drop in the number of quoted retailers over the last three years, many of whom left the market due to insolvency.”

Commenting on the outlook, Mr Kelly concluded: “With the stock market indices at relatively high levels, UK plcs will come under pressure to generate growth in profits to support these share price levels.

“Costs can only be cut so far, government spending can only fall and interest rates must rise, which leaves limited options for management who might be tempted into more risky growth strategies.

“These factors alone should increase the number of profit warnings in the quarters ahead, to which we need to add the month on month cumulative effect of higher taxes following the new fiscal year.

“Companies will still need to manage forecasts and expectations tightly in what will be another difficult year – they need to be prepared for the long haul.”