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Warning signs for UK economy as number of profit alerts increases

Andrew Dolliver, EY Ireland


New trends are transforming how consumers shop

New trends are transforming how consumers shop

New trends are transforming how consumers shop

The headwinds for business in 2019 were fast and furious - Brexit, trade wars, international tax reform.

These, together with rapidly changing consumer demands, created the perfect challenging storm for UK companies.

The impact has been underlined by recent EY analysis which shows that profit warnings from UK listed companies reached exceptionally high levels last year.

Close to one fifth of companies issued a warning in 2019, the highest proportion since 2001. Profit warnings have been issued across the economy, with trading and domestic sectors alike reporting on tougher conditions. Industrial and financial sectors saw the biggest increase, while sectors exposed to consumers' discretionary spending also saw an elevated number of warnings.

Evidence from EY's insolvency and restructuring teams suggest global trends were impacting the local market in 2019 compared with the narrowly focussed domestic challenges experienced a decade ago. Though uncertainty surrounding Brexit may have played a part, the ever-increasing level of global competition and the technological disruption underway in many sectors has been a more significant driver.

The top five reasons for profit warnings were: delayed and discontinued contracts, sales short of forecasts, political uncertainty, pressure on pricing and operational issues.

Notably for Northern Ireland (NI), the retail and construction sectors were amongst those that reported some of the biggest increases in warnings and are crucial to our economy, alongside manufacturing.

Another bruising year for retail

Retailers were perhaps the most obvious casualty of this environment. They issued the largest number of warnings in 2019 (32) accounting for a third of the retail sector. This is despite disposable incomes rising over the last 12 months. New trends are transforming the way consumers shop and digital technology is changing not only how, where and when, consumers make purchases but also their expectations of retailers. In addition to this, weak consumer confidence, rising costs and intense promotional activity, created an exceptionally tough climate for retailers.

In NI we have seen the retail sector endure significant turbulence, but encouragingly there have been new openings and the strong labour market, together with a low interest rate environment, has supported growth in spending. It is the 'how and where' people are spending that is disrupting the market, rather than a fall in demand. This could help create opportunities for new business models and agile market entrants willing to be part of revolutionising the way people shop.

Construction challenges

The FTSE Construction and Materials sector issued 18 profit warnings in 2019, the highest annual total since 2012. Whilst the Construction sector has been experiencing pressure in recent years, compounded by the lack of government spending, commercial development has been relatively robust, reflecting the impressive growth in the labour market.

What lies ahead?

So what does this mean for 2020? The easing of political tensions, the restoration of the Northern Ireland Executive and promises of UK fiscal expansion, could help more companies beat depressed expectations in 2020, but our Economic Eye forecasts suggest 2020 could continue to be a challenging year for the NI economy.

Tougher global conditions, coupled with modest growth in the UK and ongoing Brexit uncertainty, are all notable headwinds.

Even if the economy improves, there will still be sectors under pressure and many companies have more underlying stresses and tensions to deal with than in previous years. Many independent retailers are expected to experience rate increases of between 20% and 40% following the 2020 rates revaluation in Northern Ireland and it is reported that the hospitality sector has also fared poorly in this revaluation.

It is clear that most sectors are facing a degree of disruption; it is how firms react that ultimately determines their future.

Companies need to remain flexible and alert to changes on multiple horizons. They must build the capabilities to put data at the heart of the organisation and create the agility to respond to market change.

It is the ability to build resilience to prepare for, and rapidly respond to, change that will be crucial. In doing so, companies increase capacity to solve business challenges, sustainably improve results and reshape for a better future.

  • Andrew Dolliver is a Transaction Advisory Services Partner at EY
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