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UK recovery hopes buoyed by improved earnings

Sunday, 21 Jul 2013 | 4:00 AM ET
Matt Clinch | CNBC

Profit warnings from Britain's listed companies fell dramatically in the second quarter, according to a new report, boosting hopes of strong U.K. growth figures for the second quarter.

Ernst and Young (EY) said 54 U.K.-listed companies warned over earnings in the second quarter – 25 percent fewer than in the first quarter.

The number of companies that issued profit warnings was the lowest since 2010, according to the report, when it was just 51.

(Read More: Forward guidance? Sterling could be about to fall)

Keith McGregor, EY's head of restructuring for Europe, Middle East and Africa, said the low number of profit warnings was a sign of growing confidence in Britain's economy.

"The U.K. recovery certainly appears more entrenched and better placed to ride out the aftershocks that have triggered sobering second half dips in economic activity in recent years," he said.

"A more benign economic climate should keep the number of profit warnings low, but below par growth will continue to create challenges."

(Read More: Don't panic! UK recovery is 'firmly entrenched')

EY's report comes ahead of the first estimate of U.K. gross domestic product (GDP) on Thursday, and follows a slew of better economic news which has led a number of organizations, including the International Monetary Fund, to upgrade their growth forecasts for the country.

UK Trends Are 'All Improving': Pro
David Owen, managing director and chief European financial economist at Jefferies, talks about the U.K. economy following positive data and what the market expects of Mark Carney.

Last week, analysts said strong retail sales and employment data boded well for U.K. GDP, which is expected to come in at around 0.6 percent quarter-on-quarter.

The retail and construction sectors in particular had shown signs of improvement in the second quarter, according to EY.

Just two retail companies issued profit warnings, the lowest since 2010, as British consumers got a boost from the strong employment figures and an improving housing market.

Meanwhile, three companies in the construction and materials sector warned over earnings – a slight rise from the first three months, but four fewer than the same period in 2012 when they equalled their credit-crunch high.

(Read More: Bank of England unites against QE under Carney)

Still, EY was cautious about the future, arguing that although the momentum should prevent a "summer setback," there were clouds on the horizon.

"The recovery is no stranger to false dawns and profit warnings have followed this pattern, dropping to historic lows, only to spike back up as recovery hopes are dashed," McGregor said.

"Domestic and external challenges look set to limit the rate of growth and the U.K. economy is still a long way short of its pre-crisis level of activity. It is a brighter outlook, but the recovery has a few years yet to run."

U.K. earnings season kicks off with a vengeance next week, with FTSE 100 stalwarts including GlaxoSmithKline, BT, Unilever and Pearson among the companies due to report.

-- By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop

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