One in Five UK Companies Warn of Declining Profits Amidst High Interest Rates

UK-listed companies sounded the alarm as 2023 saw 294 profit warnings, equivalent to one in five businesses, signalling concerns about declining profits in the coming year. According to a report from EY-Parthenon, though the number is slightly lower than the 305 recorded in 2022, the percentage, at 18.2%, is higher than the 17.7% seen during the peak of the 2008 financial crisis.

A significant challenge facing these companies is the soaring cost of borrowing, with the Bank of England's (BOE) base rate at a 15-year high of 5.25%. This has reduced market confidence, caused supply chain disruptions, and led to slower growth for businesses across various sectors.

Jo Robinson, UK and Ireland Turnaround and Restructuring Strategy Leader at EY-Parthenon, highlighted that sectors foundational to supply chains, like chemicals, and those dependent on business confidence, such as recruitment, experienced a rising number of profit warnings towards the end of 2023.

While most warnings earlier in the year came from smaller companies, larger businesses also faced difficulties in the final quarter of 2023. A startling trend was that companies with annual revenues greater than £1 billion (€925 billion), which is more than double the average amount, issued a third of the 77 profit warnings during that time.

Sectors hit particularly hard included leisure goods, retail, household goods, and home construction. Consumer spending on essential items is rebounding, but there is still caution in discretionary purchases, according to EY-Parthenon.

As companies grapple with these challenges, the Bank of England's upcoming decision on interest rates becomes crucial. Currently standing at a 15-year high, there is hope that inflation cuts in the coming year could alleviate some pressure on struggling businesses.

Jo Robinson expressed optimism about the potential for inflation and interest rate reductions in 2024, making the earnings and forecasting environment less daunting. However, she cautioned that uncertainties such as rising geopolitical tensions, supply chain disruptions, electoral uncertainty, and weak growth could complicate recovery.

The Bank of England's next meeting is scheduled for this Thursday, where the latest interest rate decision will be announced, providing further insight into the economic trajectory for the UK in the coming months.