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Supply chain crisis threatens to plunge record number of firms into the red

Swelling costs fuelled by entangled supply bottlenecks pose a serious risk to derailing the economic rebound by cutting households’ spending power, the International Monetary Fund (IMF) has warned

The global supply chain crisis is threatening to plunge a record number of companies into the red, reveals a closely watched study released today.

Nearly half of the 70 listed companies that issued profit warnings in the final three months of last year blamed their poor performance on the supply chain crisis, according to research carried out by consultancy EY.

A sudden surge in global demand as economies around the world emerged from Covid-19 restrictions has snapped supply chains, derailing the normal functioning of global trade flows.

Ports in the US have stalled due to containers piling up as a result of a shortage of truck drivers to move them around the country. 

Meanwhile, trade hubs in Asia, most notably China, have suddenly shut down in a bid to tamp down on Covid-19 outbreaks, severely constraining flows of containers around the world.

The gumming up of the global supply web has raised prices for raw materials and other key components used in production processes, raising businesses’ costs and eating into their profits.

Overall profit warnings climbed 19 per cent over the last year and are up from 51 issued in the final quarter of 2020.

The first half of last year saw few profit warnings distributed by UK listed firms.

However, “by the second half of the year, an increasing number of companies were issuing profit warnings as forecasting and earnings challenges evolved and multiplied,” Alan Hudson, turnaround and restructuring strategy leader at EY, said.

The supply chain crunch did not emerge until the second half of last year.

City economists mostly do not expect supply chain disruption to unravel until at least the back end of this year.

Worryingly, firms are now facing headwinds to their revenue as a result of the soaring cost of living eating into Brits’ household income and hitting consumer spending.

“The biggest driver of warnings in 2022 is likely to be the rise in inflationary pressures and its impact on disposable incomes and margins,” Hudson added.

“We have already recorded profit warnings relating to rising energy prices. Labour shortages and wage increases are also beginning to feature more in company concerns, especially in logistics, hospitality and healthcare – including care homes.”