UK business confidence crashes as profit warnings hit two-year high

British businesses are grappling with a significant surge in profit warnings, as new data reveals the number of UK-listed companies issuing alerts jumped by 71% in the third quarter of 2024. The dramatic increase signals mounting pressure on corporate Britain amid persistent economic uncertainty.

According to EY-Parthenon’s latest analysis, 84 profit warnings were issued between July and September, marking an 11% year-on-year increase and the highest quarterly total in two years. Perhaps more troublingly, nearly one in five UK-listed companies (19.2%) has issued a profit warning in the last 12 months—a level not seen since the pandemic.

The Waiting Game Takes Its Toll

The root cause of this sharp uptick appears to be widespread hesitation in business spending and investment. An unprecedented 38% of profit warnings cited delays and cancellations in contracts and orders—the highest percentage recorded in 15 years. This reluctance to commit to new contracts has been particularly pronounced in the technology and industrial sectors, where over 70% and 90% of warnings respectively were linked to either lower orders or contract delays.

Jo Robinson, EY-Parthenon Head of UK & Ireland Turnaround and Restructuring Strategy, notes that this latest rise wasn’t triggered by a sudden economic downturn or cost pressures. Instead, she points to “a real-time change in sentiment that companies can pick up in slowing order books before it appears in economic data.”

The financial markets have responded decisively to these warnings. The median share price fall on the day of a profit warning reached 15.2% in Q3, up sharply from 9.7% in the previous quarter. Technology companies bore the brunt of investor concern, suffering an average share price decline of 29% following profit warnings.

Sectors Under the Spotlight

Industrial Support Services led the way with 10 profit warnings, followed by Technology Hardware & Equipment with eight, and Software and Computer Services with seven. The manufacturing sector has faced particular challenges, especially in engineering and materials, where companies are dealing with complications in both the commercial aerospace and automotive sectors.

The automotive industry finds itself at a critical juncture, with annual car sales in Europe running three million below pre-pandemic volumes and most major OEM factories operating below capacity. The situation has been further complicated by uncertainty around electric vehicle sales and upcoming regulatory changes.

Economic Headwinds Gather Strength

The broader economic picture provides little comfort. The EY ITEM Club has reduced its GDP growth forecast for 2024 to 0.9%, down from the 1.1% predicted three months ago. Looking further ahead, growth projections for 2025 and 2026 have also been trimmed to 1.5% and 1.6% respectively, down from earlier forecasts of 2.0%.

The surge in profit warnings appears to stem from a perfect storm of uncertainties. Speculation around the UK Budget and policy changes, heightened geopolitical tensions, and the looming US election have all contributed to a more cautious business environment. Industrial surveys, including the Confederation of British Industry’s Industrial Trends survey, have noted contracting manufacturing output with expectations of further declines in the fourth quarter.

Recovery or Recurring Pattern?

While there’s potential for a rebound if business and consumer confidence improve, the UK faces longer-term structural challenges. The trend growth rate has fallen to around 2% from 2.75% in the decade before the global financial crisis, suggesting deeper underlying issues that need addressing.

“If uncertainty lifts, profit warnings could fall,” suggests Robinson. “But we think that the volatile macroeconomic and policy backdrop, coupled with profound changes in technology, consumer behaviour, and the climate challenge, will make sudden shifts in earnings expectations more likely.”

A Call for Vigilance

The report emphasises the need for companies and their stakeholders to remain vigilant and proactive in identifying and addressing emerging issues before they escalate. While new restructuring solutions offer opportunities for value preservation, prompt action remains crucial in securing the best possible outcomes.

As British businesses navigate these challenging waters, the coming months will prove critical in determining whether this surge in profit warnings represents a temporary blip or signals a more fundamental shift in the corporate landscape.

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