The number of profit warnings issued by companies rose to a two year high in the first quarter of 2011 as rising inflation squeezed consumer spending power, a new report has claimed.
UK-listed companies issued 75 statements cautioning that earnings would not be as high as previously expected, an increase of nearly 50 per cent on the previous three months, according to the report by Ernst & Young.
It is the highest number of profit warnings since the first quarter of 2009 when the UK was battling to pull itself back into economic growth.
A quarter of the companies whose profits were hit blamed rising costs, as oil and other commodities soared in prices, while a third pointed to the disruption caused by December’s snow.
Ernst & Young said inflation was set to continue to squeeze margins in coming months as oil and commodity prices push upwards.
Keith McGregor, a restructuring partner at Ernst & Young, said: “The snow was a contributing rather than a lead factor in many of these warnings. By the end of the quarter, squeezed consumer spending and rising commodity price concerns had moved to the fore.
“The sharp rise in profits warnings at the start of 2011 confirms the belief that the year ahead will be considerably more testing for some parts of the UK economy.”
He added that companies normally issue fewer profit warnings in the second quarter of the year, but there is an expectation that the number in 2011 will be significantly higher than a year ago.
Retailers were responsible for more profits woe than any other sector, after issuing 14 gloomy updates - the highest since the start of 2008.
Shops reported tough conditions in the first three months of 2011 as the squeeze in consumer spending depressed sales figures and made it hard for them to pass on price rises to customers. January’s rise in VAT to 20 per cent from 17.5 per cent has made bad conditions worse.
A string of retailers have provided disappointing updates in recent weeks, including Mothercare, HMV and Dixons Retail, which owns PC World and Currys.
Consumer spending declined for the first time in nearly 30 years in recent months as wages fail to keep up with price rises, leaving shoppers less likely to splurge on non-essential items.
The consumer services sector, which also includes media and travel and leisure, issued three times as many profit warnings in the first quarter of 2011 as they did a year ago.
Alan Hudson, a restructuring partner at Ernst & Young, said: “The new-year VAT rise combined with the uncertainty generated by rising unemployment and the squeeze on consumer income has made it a tough start to 2011. Consumer service sectors look especially vulnerable.”
A fifth of travel and leisure companies have warned on profits so far this year as the rising cost of oil pushes up their prices and Mr Hudson said this sector still faces tough times ahead.