Profit warnings surged to 107 in final quarter of 2007

The number of profit warnings issued by UK businesses in 2007 reached the highest level since 2001, and a last-quarter surge in bad news has triggered fears that 2008 could prove to be even worse.

The latest figures from Ernst & Young revealed that there were 384 profit warnings issued by UK companies in 2007, the worst performance in six years. In the fourth quarter alone there were 107 warnings, 22 per cent higher than in the same period in 2006 and the highest quarterly figure since the economic turmoil that followed the September 11 attacks.

The spate of warnings has been triggered by the fallout from the US sub-prime mortgage crisis and the credit crunch, with one in five companies pointing the finger at those factors. However, more surprising was the speed at which companies from outside the financial services sector felt the impact of the credit crunch, as the majority of profit warnings came from the support services, retail, media, software and travel sectors.

Keith McGregor, corporate restructuring partner at Ernst & Young, said: "The contagion has spread very quickly."

He continued: "By the end of 2007, the question of whether the impact of the credit crunch would spread beyond the financial sphere was answered by a wave of 'credit crunch' profit warnings from non-financial corporates."

The general retail sector proved the worst affected in the final three months of the year, with 12 profit warnings, taking the total for the year to 47 – a record number.

Despite Christmas trading not being the "complete disaster" some had expected, Ernst & Young warned that with discretionary spend likely to come under further pressure, 2008 could prove even tougher.

Andrew Wollaston, corporate restructuring partner at the consultancy, said: "Christmas might well have been the consumer's last hurrah. In the next few days, credit card bills will hit the doormat. The era of easy credit is over. Corporate activity and restructurings of poorly performing retailers look inevitable in the year ahead."

Mr McGregor said that retailers won't be the only sector to continue to feel the pain of the credit crunch in 2008. "The UK economy will slow in 2008; the only question is how much. Sectors reliant on fluid credit markets will continue to struggle, as will those dependent on the consumer. In addition, it is likely that refinancings will be more challenging going forward."

He added that companies would "have to get smarter with their forecasting."