Debt expected to act as brake on recovery

Research by Ernst & Young shows that the number of companies in Yorkshire and the North East issuing profit warnings tailed off towards the end of 2009. However, the report warns that there could be further economic upheavals during 2010.

Thirty-nine profit warnings were issued by listed companies in Yorkshire and the North East during 2009, compared to 36 in 2008, according to research released by Ernst & Young.

Last year began with profit warnings peaking in the first quarter one (19) – but fell to just five in the fourth quarter of 2009.

The sectors that issued the most warnings in 2009 in the region were: support services (11), general financial (six), and industrial engineering (five).

Hunter Kelly, the Leeds-based Yorkshire restructuring partner at Ernst & Young, said yesterday: "2009 was a tale of two halves; 29 warnings were issued in the first six months of the year and just 10 in the second half.

"A combination of fiscal stimulus, cost cutting, heavily depressed market expectations, and the levelling off of the economic downturn helped many companies to exceed earnings forecasts, keeping profit warnings low in most sectors in the second half of 2009.

"Given the depth of the slump, a levelling off has certainly come quicker than we might have anticipated.

"This, along with previously depressed earnings forecasts, is helping companies beat expectations and keep profit warnings low, but this is not the end of the story.

"The country has a rather large fiscal deficit and 2010 is when we start paying. Brace yourselves for a bumpy recovery."

Last year, five profit warnings were issued in Yorkshire and the North East during the fourth quarter – the same as the previous quarter and 74 per cent less than in the first quarter. The fourth quarter of 2009 recorded the lowest number of warnings issued in the last quarter for six years (there were four in 2003).

Yorkshire and the North East followed the UK downward trend in the second half of 2009. Fifty profit warnings were issued in the UK in the fourth quarter compared to 117 in the first quarter and 126 in the same period last year (Q4 2008) – a year on year fall of 60 per cent. The total number of profit warnings issued by UK plcs in 2009 was 282, 37 per cent less than 2008. It was the lowest annual total since 2003.

Mr Kelly added: "This shows how far profit expectations have fallen."

According to Ernst & Young, 2010 looks set to be a year of contradiction for the UK economy.

The Ernst & Young report says the start of the year should see a return to growth.

Budgetary constraints will lead to the end of the fiscal and monetary stimulus, the report argues.

Ernst & Young also predicts that the Government will pull back capital from the economy to help to plug the gap in its budget deficit.

Mr Kelly said: "Growth in the first part of the year could sit in contrast with economic stagnation or even a second dip later on.

"Either way, we will still face the consequences of the credit crunch almost three years on. The events in Dubai at the end of 2009 amply demonstrate how quickly situations can still deteriorate and reverberate around the world. The coming year could contain more of these surprises, a reminder of the continuing work needed by companies to restructure and deleverage."

The profit warning equation – the balance between performance and expectations – will even out in the first quarter of 2010 as market expectations rise to meet the "better than expected" results that have already been reported.

Mr Kelly said: "It will be harder for companies to beat expectations in the months ahead. If expectations become buoyed by optimism too quickly from election promises, the economy will be prone to relapse and we could see an increase in profit warnings later in 2010. Another tricky year is ahead."