The number of profit warnings issued by Scottish-listed businesses reached a record level in the first three months of 2020, according to research by EY.
A total of 10 were recorded by the professional services firm between the start of January and end of March, which is the highest seen in any previous quarter in the last 20 years.
The figure shows a 43% year-on-year increase on the same period last year.
A profit warning is an official statement to the stock exchange from a publicly-listed company to say it will report full-year profits materially below management or market expectations.
Across the UK as a whole, 301 profit warnings were recorded by EY in the first three months of the year, which is almost equal to the number for the entirety of 2019 and 5% higher than the total for 2018.
Compared to the same period last year, warnings rose from 89, representing a 238% year-on-year increase.
Over a fifth of the UK’s quoted companies issued a profit warning in the first quarter of 2020, more than the percentage for the whole of 2008.
Unsurprisingly this hike was attributed to the Covid-19 crisis, which has temporarily paralysed many businesses, with very few sectors immune from its effects.
Although 77% of profit warnings blamed the pandemic, EY said significant parts of the economy had been struggling before the outbreak. In January, the firm reported, warnings had increased by 43% year-on-year, when compared to the same month last year.
EY partner Colin Dempster, the firm’s head of restructuring in Scotland said: “Covid-19 has intensified the pressures businesses were already experiencing as a result of political uncertainties and rapid structural changes, which contributed towards UK profit warnings reaching a 10-year high in 2019.
“Scottish businesses have proved to be relatively resilient so far. While profit warnings are at an all-time high in Scotland, compared to other UK locations and the UK as a whole, the increase in Scotland’s figures has been more subdued in Q1.
“In January to March, warnings have increased 43% in 2020 versus 2019, while all other UK locations have at least doubled their figures year-on-year in the quarter.
“This will be partly due to the fact there are fewer listed businesses based in Scotland from sectors which have been more adversely affected by Covid-19, such as travel and leisure and hospitality.”
In the first quarter of this year, the sectors issuing the highest number of profit warnings were those most exposed to the impact of national lockdowns, and in many cases were already showing signs of stress before the Covid-19 crisis.
By percentage of firms warning, FTSE Travel and Leisure was most dramatically affected, with 70% of the sector issuing a warning, then Industrial Materials (63%) and Retailers (61%). All but five of the 42 FTSE sectors EY tracks issued Covid-19-related warnings.
Covid-19 is likely to deliver the biggest blow to UK GDP since the First World War.
Economic forecasting group, EY Item Club, estimates UK GDP will fall by 6.8% in 2020, if the UK lockdown begins to lift at the end of May, and the country experiences a slow U-shaped recovery without any major relapses.
EY expects the number of profit warnings to fall, but distress levels to rise – with echoes of 2008 to 2009 and the aftermath of the financial crisis.
The report anticipates a significant increase in corporate insolvencies when the lockdown lifts.
Mr Dempster said: “Companies face a unique set of additional challenges as they work to safeguard business continuity and the health of employees and customers.
“The true test may be yet to come, when the life support of government packages comes to an end and they resume full financial responsibility for wages as well as the payment of VAT and rent, both of which are likely to have accrued for months.”
