Profit warnings rise to highest level since 9/11

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The Independent Online

The number of profit warnings by listed companies has hit its highest level since the aftermath of the 9/11 terrorist attacks, figures published yesterday showed.

There were 42 warnings in April, the biggest number since November 2001, while profit warnings this month are running at more than two a day.

The report by the accountants Ernst & Young is the latest sign that the corporate sector is under stress from a combination of slowing consumer demand and rising prices of raw materials such as oil.

It came as a separate report said confidence among business leaders had collapsed, while another warned that the London bombings could wipe £2bn off economic growth this year.

April's jump in warnings to City investors took the number of profit warnings to 97 over the second quarter of the year, an increase of more than 50 per cent on the same period last year.

Figures provided to The Independent by E&Y showed that there were 22 warnings over the first 10 trading days this month.

Keith McGregor, the corporate restructuring partner at E&Y, said: "Business confidence is clearly faltering and ... this high level of warnings is a concern. Companies need to take action if they are to stem the tide of bad news."

More than one-third of warnings blamed "difficult or market trading conditions" - more than double the number who cited that reason in the first quarter.

Companies issuing a warning during the second quarter of the year saw their share price fall by an average of 15 per cent on the day the warning was issued. Mr McGregor said this was a harder correction than in previous quarters, "possibly reflecting growing nervousness in the market".

The highest number of warnings was by support services companies and media and entertainment businesses, with 13, and general retailers with 10.

The Institute of Directors said its survey of business executives found that the balance of those that were optimistic about the future for the economy had fallen by more than half.

The number of directors who were upbeat about the outlook outweighed the pessimists by just 19 per cent at the end of June, compared with 40 per cent a year ago.

Graeme Leach, the IoD's chief economist, said the report was a fresh reminder of the need for a quarter-point cut in interest rates next month by the Bank of England. "People in business are getting gloomier about the future, and that is going to affect investment decisions," he said.

"However current company performance remains strong and, outside of the manufacturing sector, profit expectations are firm."

Analysts and business organisations are queuing up to cut their forecasts for growth. While the Treasury still expects GDP growth of between 3.0 and 3.5 per cent, the British Chambers of Commerce said last week it was poised to cut its forecast to 2.0 per cent.

The publication on Wednesday of the minutes of the Bank's monetary policy meeting this month is expected to pave the way for an August rate cut.

John Butler, the UK economist at HSBC, said it is thought that three of the nine members of the Monetary Policy Committee voted for a cut. This followed one vote at May's meeting and two at June's, which Mr Butler said pointed to a bias towards cutting rates.

He said on three previous occasions when there were two successive minority votes, a cut followed in the third month. "Whenever voting patterns have revealed an implicit easing bias for more than one consecutive month, a rate cut has followed," he said.

Meanwhile the Centre for Economics and Business Research said the impact on consumer spending from the 7 July bombings could cut GDP growth this year by 0.2 percentage points.