Buckle up for profit warnings, E&Y says
COMPANIES are in for a “rough ride” next year as the coalition government’s austerity measures begin to suck life from the private sector, accountant Ernst & Young (E&Y) has cautioned.
Investors can expect to see a resurgence in bad news from British corporates, E&Y said, after the previous government’s fiscal splurge helped bring profit warnings to a seven-year low in the second quarter.
Just 45 firms issued warnings between April and June, down from 54 in the first quarter and the lowest number since 2003. Leisure and support services were the most troubled sectors during the three-month period. Many of the problems came from early cancellations or interruptions of state contracts.
After chancellor George Osborne revealed a programme of spending cuts and tax hikes designed to claw back £113bn per year from taxpayers by 2015, E&Y said the stockmarket should prepare for an increase in profit warnings.
Keith McGregor, restructuring partner at E&Y, said: “UK Plc could be in for another rough ride. A number of companies have already cautioned they expect much tougher times ahead when further fiscal tightening reins in public sector and consumer spending.”
Alan Hudson, also of E&Y, said: “It looks like 2011 will be a crunch year. It is then the first significant wave of fiscal tightening, including the rise in VAT, will likely coincide with interest rate rises and the upslope of a refinancing peak.”
A stronger private sector upturn by the time the tightening kicks in could help soften the blows, Hudson added, but on the other hand uncertainty around Eurozone sovereign debt problems and wider debt markets could exacerbate the squeeze on companies.