U.K. Plc issued more profit warnings in Q1 than all of 2008

By TruePublica: With news that the UK economy could shrink by an eye-watering 20 per cent if the COVID-19 outbreak is not contained by the year-end and that the likelihood of recovery back to 2019 (itself bordering on recession) levels will take at least three years, businesses are facing the type of battering that the great depression brought in the 1930s. In all likelihood, the economy is on track to lose 15 per cent of activity, with confidence falling away about how many firms will actually survive.

A Bank of England policymaker warned Britain’s economy was on course to suffer the deepest recession in several hundred years. Gertjan Vlieghe, a member of the BoE’s interest-rate setting committee, said the UK was heading for a squeeze on incomes that was unprecedented in its speed and severity.

Data firm IHS Markit said its UK composite purchasing managers index (PMI), which tracks activity across the services and manufacturing sectors, slumped to just 12.9 for April, down from 36 in March and a record since the survey began in the 90s. This was far below economists’ forecasts and well short of the 38.1 reading recorded in the depths of the 2008 financial crisis. A PMI figure above 50 indicates an expansion of business activity.

The first proper signal of impending doom are profit warnings. And it’s bad, very bad.

Over a fifth of the U.K.’s listed companies issued a profit warning in the first quarter of 2020. This might not sound bad until compared with 17% who issued profit warnings in the full year of 2008, according to a report by consultants EY. In 2008, the economic environment was dire at best and the first twelve weeks of 2020 has romped past the worst of 2008.

The economic crisis triggered by the Covid-19 pandemic has pushed up the number of profit warnings in the U.K., with 301 issued in the quarter ending March 31, almost as many as the whole of the previous year, the report stated.

Travel and leisure companies were the most affected, with 70% of the sector issuing a profit warning, followed by industrial materials (63%) and retailers (61%).

EY expects a significant increase in corporate insolvencies when the lockdown lifts. “It will undoubtedly ease some pressures, but these underlying issues will remain – alongside new challenges,” Alan Hudson, EY’s U.K. Head of Restructuring, wrote in an emailed comment.

The country’s gross domestic product will fall by 6.8% in 2020 if the lockdown begins to lift at the end of May, and the U.K. experiences a slow ‘U’ shaped recovery without any major relapses, according to EY forecasting group estimates.

Although devastating, the pain in U.K. Plc cannot be fully attributed to coronavirus. In January, profit warnings increased 43% year-on-year according to EY records. This was due mainly to a looming recession caused by the uncertainties of Brexit.

“Covid-19 has created new problems, but it has also accelerated existing structural change and exacerbated existing weaknesses,” said Hudson.

The UK government has unequivocally stated that Brexit negotiations will continue with the EU irrespective of the pandemic and that there will be no extension to negotiations come December 31st.

 

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