Brexit: UK Companies Issue Profit Warnings for Second Quarter

Since 2017, the number of quoted UK companies issuing profit warnings has continued to increase. Earlier this year, high street retailers were in real trouble, as shopping trends continue to move away from physical stores into the digital retail space. Consumer confidence was also at a low, leading to less spending than normal. These issues accounted for a number of retail sector organisations issuing their warnings.

Now, however, the problem isn’t limited to the retail sector alone. Ernst & Young have reported that 69 UK companies have issued profit warnings this year between April and June (Q2) – a 19% year on year increase, not to mention the second highest increase since the 2008 financial crash. If GDP slows to 0.2% next year as a result of a no deal Brexit, then this could get worse, according to EY. Coupled with the current skills crisis in the employment sector, things are looking very rocky indeed for the economy.

Brexit to Blame?

While almost one in five businesses have stated that Brexit is a factor in these profit warnings, it’s not the only issue at hand. Global trade and growth as a whole is currently experiencing a slowdown, which is likely to have an impact going forward.

Furthermore, the main reasons for most warnings have come from a combination of lost contracts, lower sales predictions, and increasing overheads.

That said, the impact of Brexit unease can’t be overlooked, and could well be linked to the above issues. According to Alan Hudson, head of Ersnt & Young’s UK and Ireland restructuring division: “There is now clear evidence that prolonged Brexit uncertainty has created a hiatus in business activity, with companies struggling to forecast and plan, and the economic impact is spreading, affecting a broad range of sectors.”.

This holds true with some of EY’s previous reports as well. 14 FTSE sectors have issued profit warnings related to Brexit over the past year alone. Last quarter, profit warnings hit the highest they’ve been since the financial crisis, with Brexit being cited as one of the causes of problem areas for businesses.

Tumbling Share Prices

The knock on effect of these profit warnings is already being felt by the stock market. Prices for the companies issuing the warnings fell up to 20.9%, which is even higher than the worst price drop recorded at the peak of the 2008 financial crisis (20.7%).

Interestingly, Ernst & Young also noted that a number of the companies issuing these warnings were in the chemical sector. Generally, the performance of chemical companies can be a good indicator of the health of the economy, due to the fact that almost all businesses have a demand for chemicals somewhere in their business process and supply chain. Chemical companies also tend to be closely linked with global trade routes.

No Deal Implications

A no deal exit, as far as EY’s research suggests, is very likely to make things worse for businesses. The firm suggests that technology organisations and travel companies could be the next to find themselves in trouble, should the lack of any clear Brexit strategy continue.

Currently however, most food retailers and food producers have low numbers of profit warnings, and seem to be weathering the storm, comparatively speaking. This could change of course, as is the case for any sector heavily reliant on imports and exports.

Until the government lays out a clear plan for October, profit warnings may well continue into Q3.