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Monday, 30 July, 2001, 11:12 GMT 12:12 UK
Profit warnings set to increase
Stock trader
More anguish ahead for enterprises and stock markets alike
Many UK managers do not know how to handle a downturn, according to business consultants Ernst & Young.

The consultancy warned that the number of profit warnings from UK firms was likely to rise again in the third quarter of this year - up from an average of eight warnings a week issued during April to June.

The consultants counted 100 profit warnings in the three months to 30 June, with nearly half coming from high-tech firms.

Although the number of profit warnings declined 26% from the first quarter, the experts at Ernst & Young said this did not provide grounds for optimism.

The fall "should not... lead observers to conclude that companies are being more realistic about their performance, or that trading conditions are improving," warned Alan Bloom, head of corporate restructuring at Ernst & Young.

High-tech sector worst hit

Of the eight companies a week that issued profit warnings in the second quarter, high-tech firms dominated with 47% of the total.

Software and computer services companies were the worst hit, responsible for 20% of the total - the sixth quarter in a row that they have generated the most warnings.

Managers need to go back to basics in this bear economy because when you are down more things tend to go wrong than right

Alan Bloom, Ernst & Young

The next two hardest hit sectors, with 10% each, were electronic and electrical equipment, and engineering and machinery firms.

London and south-east England between them accounted for 55% of all warnings, though the biggest increase was in the Midlands and East Anglia.

Small businesses formed the overwhelming majority of companies issuing warnings, with 76% having turnover of less than 200m a year.

Premature optimism

Although the overall picture had improved from the first quarter, with 26% fewer warnings, "we would warn against premature optimism," the report said.

It pointed out that the pace of warnings increased in each month of the second quarter.

What's more, managers are finding it hard to forecast effectively.

"They understand little about management in - or on the cusp of - recession," it said.

"Managers need to go back to basics in this bear economy because when you are down more things tend to go wrong than right," it said

Rising pace

"The month on month profit warnings rise throughout the quarter points to continuing difficulty for UK business and the strong possibility of a renewed rise in figures for this year's third quarter," said Mr Bloom.

His forecast is for between 110 and 125 profit warnings in the three months to 30 September, compared with 100 in the second quarter.

The consequences of the foot and mouth disease outbreak was responsible for seven profit warnings, about the same proportion as in the first three months of the year.

The figures might increase demands from business groups for an interest rate cut from the Bank of England's Monetary Policy Committee at its meeting this week, which ends on Thursday.

UK growth is stagnant, with gross domestic product having risen only 0.3% in the second quarter of this year.

See also:

29 Jul 01 | Business
Brown voices slowdown fears
27 Jul 01 | Business
UK economy stalls
27 Jul 01 | Business
Recession fears under the microscope
25 Jul 01 | Business
London shares hit 33-month lows
19 Jul 01 | Business
London shares rebound
06 Jul 01 | Business
Marconi leads global shares down
05 Jul 01 | Business
Baltimore shares near 99% fall
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