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Spending cuts could reverse profit warnings fall in the region

IMPENDING CUTS in public spending are set to kill declining profit warnings in the region, according to a national accountancy firm.

Ernst & Young said six warnings were issued in the region in the second quarter of 2010, compared to 10 in the same period last year.

The first six months had 12 warnings in total, down from 29 in the first half of 2009.

Hunter Kelly, a restructuring partner at Ernst & Young, said the fall in profit warnings was due to the cautious approach of management teams.

The cautious trend is likely to continue in the face of forthcoming austerity measures, the hike in VAT, the cancellation of school-building projects and problems in eurozone countries such as Greece, he added.

“The economy is as flat as a pancake. Nobody is talking anything up. Everyone is talking everything down,” Mr Kelly said.

“Companies are setting a lower expectation with City brokers, therefore market information is being set at more cautious levels so they don’t need to warn the market. Are businesses doing better or worse? It’s difficult to say but they are managing expectations better.”

The sectors in the North East to issue warnings last quarter include electronic and electrical equipment, healthcare and technology hardware.

Looking ahead, Mr Kelly said: ““It looks like 2011, rather than the second half of 2010, will be the crunch period. It is then that the extra £40bn of fiscal tightening, including the rise in VAT, will likely coincide with the upslope of a refinancing peak.

Big spending in the public sector and fiscal stimulus helped to provide a buffer for many companies against the worst of the credit crunch and recession.

The withdrawal of this spending will hit the support services sector the hardest, said Mr Kelly.

This was posted in Bdaily's Members' News section by Ruth Mitchell .