UK recession wobble sends FTSE profit warnings back to Covid-19 levels
The UK’s flirtation with a recession over the last year or so has prompted a wave of the country’s top companies to warn shareholders to expect profits to miss forecasts, a new report out today shows.
Profit warnings among UK-listed firms climbed to 75 in the first three months of this year, the highest level since the early days of the Covid-19 crisis and up from 72 a year ago, according to EY-Parthenon.
In the first quarter of 2020, profit warnings reached a record high of more than 300 as the UK plunged into a lockdown to tame virus cases.
Britain’s flagging economy has been gripped by a huge surge in energy prices – mainly caused by Russia’s invasion of Ukraine jolting international oil and gas markets.
Bank of England Governor Andrew Bailey and co have jacked up interest rates 11 times in a row to a post-financial crisis high of 4.25 per cent and are expected to send them to a peak of five per cent, adding to the squeeze on the UK’s biggest businesses.
“Persistent economic uncertainty has played a significant role in many of these profit warnings,” EY-Parthenon said, adding that more than one in three alerts were triggered by customers ditching contracts, signalling demand is flagging in the UK.
Issuing a profit warning can have disastrous consequences for a firm’s share price. Earlier this month, banknote maker De La Rue alerted investors to its financial woes, prompting its share price to collapse nearly a third in one day.
Tech firms led overall profit warnings even higher, as just over one in five came from the sector, which has been rocked by central banks hiking interest rates aggressively to tame prices. The sector has relied on rock-bottom rates to prop up its business model.
The return to early pandemic day levels of profit warnings illustrates how tough the economic slowdown has been over the last year.
However, figures released since the turn of the year have signalled the economy is a lot stronger than experts – some of whom had warned of the UK sinking into its longest recession in a century – had feared.
Purchasing managers’ indexes last week found the country’s private sector is growing at the fastest pace in a year. Official GDP stats have also shown that the country narrowly avoided a technical recession, defined as two back-to-back quarters of negative growth, at the beginning of this year.
But analysts cautioned the country is still in the grip of a slow-burning economic slump.
“Economic forecasts may have seen some improvement in recent months. However, the extraordinary strength of headwinds over the last two years has left some businesses facing recession-like conditions,” Jo Robinson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, said.
“This has taken its toll on business confidence and, as pressures move through the supply chain, we’ve seen a higher number of companies warning of delayed or cancelled contracts in comparison to the last quarter,” she added.