Low profit warnings – but firms reporting difficult times

Five profit warnings were issued by quoted companies in Yorkshire and the North East during the third quarter of 2010, compared to six in the previous quarter, according to the report.

Profit warnings in the region have remained relatively low (under six) for the past 12 months.

Hunter Kelly, restructuring partner at Ernst & Young in Leeds, said: "At first glance, this looks like positive news. However, look below the surface and there are some very telling changes. The proportion of UK companies reporting difficult trading conditions rose significantly for the first time this year to 50 per cent."

Nationwide, UK quoted companies issued 46 profit warnings in the third quarter of 2010, compared to 45 in the second quarter of the year.

The UK sectors with the highest number of warnings were: support services (seven); software and computer services (six); travel and leisure (five); and media (five).

"Given the cutbacks in Government spending, the level of warnings from support services and software and computer services is perhaps not surprising," said Mr Kelly.

Ernst & Young said significant fiscal and monetary stimulus helped to avert disaster in 2008-9 as well as keeping the economy going in 2010.

"The huge global debt overhang and the necessary and painful deleveraging that is still required from not just Governments, but also businesses and households, looks set to encumber growth for years to come," said Mr Kelly.

The report said the most pressing issue is next week's Comprehensive Spending Review announcement and the potential impact of increased fiscal austerity on companies, consumers and the economy.

"The secondary effects of fiscal austerity on consumer spending and confidence are great unknowns," said Mr Kelly. "The risk of job cuts and profit reductions arising out of the Review, together with the known tax rises, are bound to have an impact on demand and thus corporate profitability."

"Given the unpredictable nature of the recovery, planning and forecasting could prove exceptionally tricky in the year ahead," said Mr Kelly. "Both over-caution and over reaching are all too easy in this environment. The challenge for UK plc will be to find the sweet spot between the two."