By Max Clarke

Britain’s struggling retail sector has led to low-profit warnings being issued to shops at the fastest rate for over 2 years.

As household incomes continue to fall across the UK, the reduced spending power is being felt in the retail sector where low-profit warnings have hit their highest rate since the beginning of 2009, according to Ernst & Young’s latest Profit Warnings report.

Rising inflation ranks highly among current challenges facing companies, consumers and policy makers alike. The coalition government’s ambitious fiscal tightening program needs the balance of a loose monetary policy to prevent fiscal austerity derailing the UK’s budding economic revival. However, persistently above target inflation is heaping pressure on the Bank of England to raise interest rates before the recovery can put down strong roots, as well as placing unwelcome additional strain on company, consumer and public purses.

Alan Hudson, restructuring partner at Ernst & Young, commented, “Consumer service sectors look especially vulnerable. 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. Add volatile input prices, the threat of rising interest rates and changing consumer shopping behaviour into this mix, and forecasting profits for 2011 becomes exceptionally difficult for those selling goods and services to the consumer.”

Though retail continues to face hard times, UK restaurant and hospitality sectors has defied the recession to post record growth of 6.2%.

“Overall, the UK’s recovery looks just about strong enough to withstand these tests, but growth in many sections of the economy will remain subdued and, against a trickier domestic backdrop, consumer-facing companies in particular are finding 2011 much tougher going than 2010,” concluded restructuring partner Keith McGregor at Ernst & Young.