One in five UK companies warns of declining profits as high interest rates take their toll.
ADVERTISEMENTUK-listed firms issued 294 profit warnings in 2023, according to a new report from EY-Parthenon. That means one in five businesses sent official warnings to investors about predicted profit declines for the coming year.
While the number is lower than the 305 figure recorded in 2022, it amounts to 18.2% of listed firms, which is higher than the 17.7% seen during 2008, the peak of the financial crisis.
One of the key challenges facing firms at present is the high cost of borrowing, as the base rate of the Bank of England (BOE) currently sits at a 15-year high of 5.25%.
As a result, companies say they have seen less growth, more supply chain disruption, and reduced market confidence.
“At the end of 2023, we saw a rising number of profit warnings from sectors at the foundation of supply chains, like chemicals, and those reliant on business confidence, such as recruitment,” said Jo Robinson, UK & Ireland turnaround and restructuring strategy leader at EY-Parthenon.
Robinson also noted that, while at the start of 2023 the majority of warnings were coming from smaller companies, large businesses also began to face difficulties towards the end of the year.
In the final quarter of 2023, a third of the 77 profit warnings were issued by companies with annual revenues higher than £1 billion (€925 billion), more than double the average figure.
Sectors hit particularly hard last year included leisure goods, retail, and household goods and home construction.
Consumer spending on essential items is recovering, but EY-Parthenon reported that the appetite for discretionary purchases is still lower than usual.
Looking at the year ahead, the prospect of inflation cuts could ease some pressure on companies in difficulty, the strategy leader believes.
“We start 2024 with increasingly optimistic hopes for inflation and interest rates, which would make the earnings and forecasting environment less daunting,” said Robinson.
“But a smooth path to rate cuts and a soft-economic landing isn’t guaranteed given the range of challenges ahead, including rising geopolitical tensions, supply chain disruption, electoral uncertainty and what is still weak growth.”
The BOE’s next meeting is due to meet this Thursday, after which it will announce its latest interest rate decision.
