Growth on the cards for UK economy

September 2013 | FEATURE | ECONOMIC CONDITIONS

Financier Worldwide Magazine

Following years of uncertainty and false dawns, the UK economy is beginning to show signs of growth according to a new report released by Ernst & Young (EY). Indeed, EY’s analysis of profit warnings for Q2 2013 points to the economy undergoing a cautious recovery.

In its report, EY noted that profit warnings from Britain’s listed companies fell to their lowest level since 2011 in Q2. Just 54 UK-listed firms issued warnings over their earnings – a 25 percent drop from the 72 profit warnings issued in Q1 2013. This is the largest recorded drop for four years. Q2 also saw the lowest number and percentage of companies issuing warnings in a second quarter since 2010, at 51 percent and 3.8 percent respectively.

The sectors with the highest number of warnings issued were software & computer services with seven, and travel & leisure with six. The media and support services sectors issued five profit warnings. The electronic & electrical equipment sector reversed the trend of falling industrial profit warnings by issuing five warnings; EY’s data noted that just under a third of the sector has issued profit warnings thus far in 2013. The electronic & electrical equipment industry has had to deal with tighter conditions in a number of key markets as well as being placed under constant pressure to maintain innovation.

According to CIPS/Markit Purchasing Manager Index (PMI) both the services and manufacturing sectors are growing at their strongest level for over two years. The services sector in particular is expanding quickly, and profit warnings in the support services industry fell from 13 in Q1 2013 to five in Q2.

Although the second quarter usually sees a fall in profit warnings, according to Keith McGregor, EY’s head of restructuring for Europe, Middle East and Africa, the recovery seen in the UK during Q2 appeared “more entrenched and better placed to ride out the aftershocks that have triggered sobering second half dips in economic activity in recent years”. However, he also noted that “a more benign economic climate should keep the number of profit warnings low, but below par growth will continue to create challenges. Companies should still be flexing their operating and financial structures to adapt and make the most of what is still a relatively modest recovery”.

Activity in the construction sector is also picking up, albeit only moderately outside of house building. Profit warnings in the construction and materials sector are down compared with Q2 2012. In the second quarter of last year the construction sector reported seven profit warnings, equalling the highest number recorded during the credit crunch. In the second quarter of 2013 the sector recorded three profit warnings, an increase on the two warnings issued in the year’s first quarter.

During the second quarter of 2013 just two retail companies issued profit warnings, the lowest recorded number since 2010. A number of other organisations support EY’s optimistic view of the retail sector. According to data released by the British Retail Consortium, like for like sales rose by 1.4 percent year on year in June 2013 and total volumes rose by 2.9 percent, after growing by 3.4 percent in the year to May. The consortium also noted that in June consumer confidence rose to a 25-month high.

Improvements in the retail sector do not, however, signify that the spectre of insolvency has left the industry altogether. In fact, the recent raft of high street administrations among companies such as Nicole Farhi, Internacionale, ModelZone, Ark and Dwell all point to a continuation of the challenges retailers have faced for a number of years. Average wages before bonuses are only rising at around one-third the rate of inflation, and disposable income will also continue to be negatively affected for some time to come.

EY’s findings were further reinforced when, in the wake of strong retail sales and employment figures, official data revealed that the UK’s gross domestic product (GDP) grew by 0.6 percent in the second quarter of 2013, doubling the 0.3 percent rise seen in Q1. The economy was firing on all cylinders during Q2 with the service sector growing by 0.6 percent, the manufacturing sector by 0.4 percent and the construction sector growing by 0.9 percent.

Clearly, in the UK green shoots of recovery are beginning to show. However, it is important to bear in mind that there have been a number of false dawns in the nation’s economic recovery. Regardless, it is crucial that firms get their operational and financial priorities right during the recovery if they are to prosper. Leaner, more creative firms will be better placed to thrive in the coming years.

Richard Summerfield