The number of profit warnings issued by UK-listed companies rose to 66 in the second quarter of 2023 – the highest second quarter total since 2020, a report today shows.
According to EY Parthenon, the figures represent the seventh consecutive quarterly increase in profit warnings and the longest run of consecutive increases since 2008-9.
"Companies are feeling the impact on their own balance sheets, on their customers, and on demand in the wider economy, especially in sectors where credit availability has been a key driver of activity," said Jo Robinson, EY Parthenon head of UK & Ireland turnaround and restructuring strategy.
"This is most obvious in the housing market, where a slowdown triggered 14% of profit warnings in Q2 2023 and the highest level of construction warnings in three years.
"But our data also highlights the broader impact and there is more to come. The number of businesses and consumers that had previously locked in low interest rates has postponed the impact of rising base rates, but not indefinitely."
In 2023's second quarter, 20% of profit warnings cited changing credit conditions, amid higher interest rates. 14% of profit warnings cited a weakening UK housing market. The median share price fall at firms issuing a profit warning was 10.4% on the day of the warning, the lowest such hit since Q2 2021.
But it is mid-market companies causing the most concern. In Q2 2023, 29% of profit warnings came from companies with between £200 million and £1 billion in turnover – the highest proportion of mid-sized firms issuing warnings in four years.
EY Parthenon still expects the UK to avoid a recession in 2023, but cites increased downside risk compared to its previous reports.
"Many businesses refinanced at low rates before this tightening cycle. The UK also has around a third of households that own their homes outright, whilst most of the third that have taken out mortgages did so at fixed rates," it said.
"This means that the pass through of interest rates increase hasn’t been quick or even. But around 800,000 households will come off their fixed-term mortgage deal in the second half of 2023 and a further 1.2m in 2024.
"The impact on these households will be significant, as are the record rent increases for tenants. The aggregate savings ratio is high, but withdrawals are coming at a record pace and most households have savings below £1,000."
"This slow burn impact means that we’re unlikely to see recession in 2023 and the first half of the year may even exceed expectations. But UK GDP growth will be marginal this year and next, with risks to forecasts skewed to the downside."
Businesses should also be mindful of the consequences of delay, EY said.
"When companies spot a problem, it is vital that they act quickly," it said.
"Delay and denial limit the options available for businesses to turn the situation around. Keeping stakeholders on board is also essential so they can work with a business and its turnaround. Confidence can drain very quickly in a downturn."
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