There was a big jump in profit warnings in the second quarter of 2016, but it may be a one-off and down to uncertainty caused by the EU referendum, according to EY.
According to the report, there were 66 profit warnings in the second three months of the year, compared to 57 in the same period last year. It was the second highest number for the quarter since 2008.
EY said that “seven profit warnings – 11% of the total – cited ‘Brexit’ in Q2, with most referring to the impact of uncertainty on demand, and the weaker pound.”
EY warned that “upheaval and transformation are becoming the norm”.
It added: “Companies will need an integrated response to help them navigate their way through this period of immense change. The winners will be those that demonstrate clear thinking about their priorities, build in resilience to cushion the knocks, and ensure they can take advantage of opportunities.”
What to watch out for next?
EY said that profit expectations have in any case been falling “since last summer’s market shudder, which has created a low bar,” and that “it will take some time for some effects to work through and companies will be uncertain at this point about the extent and longevity of any adverse changes”.
It warned that areas where pressures my build include: contracts and investment, government spending, financial services, consumer confidence, currency transaction and labour costs.
Then again, since EY completed their report, the government has been making noises about increasing infrastructure spending. However, the falling pound will create some inflationary pressure, at a time when inflation was rising anyway. Inflation may rise above 3% next year, meaning that growth in real wages may go negative, this will clearly hit companies in the business of selling to the consumer. Exporters, especially those with sales beyond the EU, may benefit from the falling pound.