The stark warning came in Ernst & Young’s quarterly survey, which measured a record increase in the number of warnings – painting a murky picture for UK plc.
Already tough trading conditions were worsened by the poor winter weather, the foot-and-mouth epidemic and problems with transport systems. The rise in profit warnings exposed the fragility of the UK economy, and tested the ability of companies to respond effectively in a crisis, the survey said.
Alan Bloom, head of corporate restructuring at E&Y, said mid-tier companies had borne the brunt of the slowdown, with warnings rising to 31% from 21% a year ago. And the firm found the stock market to be particularly unforgiving, with companies losing an average of 22% of their value after issuing profit warnings.
Leading the plunge was the IT sector, which registered the highest quarter-on-quarter increase in profit warnings climbing by 14% to 19, followed by the hospitality and entertainment sector and the support services industry.
Almost 80% of the IT companies blamed declining profits on the downturn in the US economy – most recently American IT giant Cisco revealed it would get rid of 25 % of its workforce – while another reason cited by most was delays to contracts and negotiations.
Bloom said US orders with UK companies would delay, reduce or disappear entirely over the coming months, while John Harley, a partner in the firm’s corporate finance division issued a downbeat forecast:
‘Some companies may not survive to make further warnings. The survivors will be those who can demonstrate productivity in areas that will save their customers money – like e-enablement and outsourcing.’
More worrying, there appears no end in site to the drop in the IT market, an industry characterised by turbulence and free-falling share prices. According to the survey, well-established companies would begin to feel the effects of the recession, with further cuts in IT spending, retrenchments and frozen contracts expected.
The Leisure, Entertainment and Hotels sector suffered at the hands of foot-and-mouth and the poor weather. The epidemic alone accounted for 11 profit-warnings in the quarter, with the effects of the epidemic expected to be felt well into 2002.
‘The economic effects of the epidemic will not die as foot and mouth fades. Confidence has taken a big hit in tourism and agriculture,’ Bloom said.
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