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E & Y: “The worst is yet to come”

Accountancy giant Ernst & Young cast more gloom on the state of the economy yesterday as it said profit warnings in the final quarter of last year rose dramatically as customers held on to their cash.

In its latest quarterly analysis of profits warnings undertaken by its corporate restructuring division, the accountancy firm said that the coming months were likely to be even tougher, with firms in the entertainment and hotels sector under increasing pressure.

A total of 106 companies issued profit warnings in the three months to 31 December, up 19 per cent on the previous quarter, with a particular surge in the number of leisure companies warning that their profits will be lower than expected.

The leisure, entertainment and hotels sector saw the most significant rise with a record 15 warnings, almost double the eight seen in the previous three months.

The news will add further gloom to the vapid stock markets, which are already haunted by the spectre of war with Iraq.

The FTSE 100, currently experiencing the longest period of falling share prices since 1940, is expected to open lower today following the Dow’s 238-point drop last Friday.

Meanwhile, the British Chamber of Commerce reported that confidence levels in the manufacturing sector for the coming year are down dramatically, with employment prospects worsening.

And job cuts in the City of London, Europe’s financial hub, may rise to 35,000 by the end of this year because of the financial market downturn, according to the Centre for Economics and Business Research.

The City, home to some of world’s biggest investment banks, has already seen an estimated 20,000 bankers and related staff lose their jobs since late 2000, in the face of the worst downturn in the financial industry for three decades.

“We had expected 2003 to produce a further 10,000 job losses,” the CEBR said in its January economic bulletin, entitled London’s Pinstriped Battalions Suffer 35,000 Casualties.

“Our research suggests job losses in 2003 will now be around 15,000, or 10.8 per cent.” it said.

Ernst & Young said companies in sectors such as construction and media also suffered badly from profit warnings at the tail-end of last year, signifying an increased slowdown in consumer spending.

Kevin Hewitt, corporate restructuring expert at Ernst & Young, said: “We are seeing further evidence of a waning in consumer confidence.

“Companies exposed to consumers tightening their belts on discretionary spending have contributed strongly to a rise in profit warnings for the second quarter in a row. This momentum looks irresistible and we anticipate a further increase in profit warnings in the first quarter of this year.”

The generally sluggish economic conditions contributed to 43 per cent of companies citing “difficult market or trading conditions” as the single most common cause of the warnings.

Ernst & Young said nervy investors were quick to exact revenge with shares in the company making the warning falling by an average of 24 per cent in the first day.

Iain Wilkie, head of hospitality, leisure and gaming at Ernst & Young, said the sector was “looking at a very mixed year”, with strong performances by individual companies overshadowed by a volatile market.

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