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Last Updated: Sunday, 15 July 2007, 14:33 GMT 15:33 UK
Profit warnings at five-year high
Kwik Save store
Kwik Save is one victim of the squeeze on consumer spend
Profit warnings issued by UK-listed firms are at their highest level since the low point of the technology-led stock market crash in 2001.

In the first half of 2007, 191 companies cut earnings forecasts, 13% more than in the same period in 2006, research by Ernst & Young has shown.

A shortfall in sales was the most often quoted reason for warnings, suggesting a downturn in the UK economy.

Software and support services firms issued the most earnings downgrades.

More than 230 profit warnings were issued at the beginning of 2001 at a time when the UK stock market had almost halved in value since its exuberant peak in the final days of the dotcom boom.

The decline in consumer spending is marked and has serious ramifications for retailers
Ernst & Young

Keith McGregor, corporate restructuring partner at Ernst & Young takes the view we are a long way from the economic climate of that time.

But he cautioned that the high number of profit warnings "are a reminder that segments of UK plc are struggling" in a changing environment of rising interest rates and more expensive borrowing costs.

Retail casualties

Worst affected were software firms, with 14 out of 171 - 8% - cutting earnings expectations, followed by support services, where a fifth have reduced earnings expectations for the year over the last 12 months.

General retailers remain under pressure, reflected in that twice as many issued profit downgrades in the second quarter of this year as the same period last year.

Who was hit hardest?
Software firms: 15 profit warnings
Support services: 12 profit warnings
Retailers: 10 profit warnings
Electronics industry: 7 profit warnings
Source: Ernst & Young

"The combination of higher interest rates, rising mortgage payments and household bills has left consumers with the smallest proportion of discretionary income for five years," said Andrew Wollaston, also a partner at Ernst & Young.

"The decline in consumer spending is marked and has serious ramifications for retailers, especially those selling big-ticket or discretionary items."

Recent retail casualties include music retailer Fopp and grocery store Kwik Save, but even high street giants Tesco and Marks and Spencer have recently reported tougher trading conditions.

Changing seasonal patterns

The clothes industry was also hit by consumers tightening their purse strings, with more than half the companies quoted on the London Stock Exchange issuing profit warnings in the last 12 months - four in the second quarter of this year.

The assumption of 'risk-free' lending will have to change
Ernst & Young

They are also likely to suffer from June's wet weather, an extension of the changing seasonal patterns of recent years, combined with low-cost imports and increasing overheads that are impossible to pass on to shoppers in a highly competitive trading environment, according to Ernst & Young.

The accountancy firm predicts that middle market chains will suffer the worst as consumers seek cheap supermarket clothing or trade up and spend their money on more up-market labels.

As for the wider economy, the study concluded that the UK could no longer rely on the combination of the last few years of fast growth, low inflation and low interest rates for economic growth.

It said it was difficult to predict the outcome of the changing economic environment, but cautioned: "Tighter credit conditions will stretch companies and consumers. The assumption of 'risk-free' lending will have to change."

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