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Profit warnings highest since 2001

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17th Jan 2006
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Last year saw steep rise in the number of profit warnings issued by UK companies, giving the highest annual total since 2001, says a report from Ernst & Young.

Some 381 profit warnings were issued in 2005, compared to 294 in 2004 - a rise of 23%. The main reasons given by companies were sales which fell short of forecasts, difficult trading and market conditions, and increasing costs.

The 23% increase in profit warnings is largely down to the collapse in consumer confidence, triggered by high debt levels and a slowing housing market,and because UK economic growth halved to 1.6%, the lowest annual rate since 1993, said Andrew Wollaston, Partner at Ernst & Young.

"Whilst there appears to be the beginnings of a recovery in the housing market and more positive news of Christmas trading from retailers, it is clear that companies are still finding it difficult to forecast in the current benign economic climate," he said. "Additionally, in a rising stock market there is an expectation on corporates to produce continuing improved profitability and this brings added pressure on forecasts."

The hardest hit sectors in 2005 were support services, retailers, engineering firms, insurance companies and computer services/software firms. The high number of profit warnings issued by retailers was not surprising, said Wollaston, given that earlier in the year, sales were at a six year low and retailers were cutting jobs faster than at any time since 1992.

Natural disasters including hurricanes Katrina, Rita and Wilma also helped to give insurers their worst year on record.

E&Y analysts expect the high level of profit warnings to continue in the first quarter of 2006, possibly with a heavier bias toward retailers, especially higher-end, clothing and electrical suppliers.

But there is cause for some optimism says Keith McGregor, E&Y's corporate restructuring partner: "Exports are improving on the back of a weak pound and global demand is increasing, creating opportunities for UK businesses. Whether the boost to the economy comes from reduced interest rates, a better export picture, or a combination of the two, it is sorely needed in order to generate better profits for companies and raise tax receipts that will help the Government to balance its budget."

The full report can be downloaded from the E&Y website.

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