Next Gen News

From travel to care homes, and construction to fashion, the effects of the government's spending cuts are already being felt among businesses

The coalition government's desire to slash public spending to reduce the deficit is having a dramatic knock-on effect on the entire British economy.

While chancellor George Osborne hopes that the private sector will create new jobs while the public sector reduces its workforce, companies are becoming increasingly concerned about the possibility of a double-dip recession. Businesses that deal directly with public bodies have seen work dry up, while other companies are being hit by the fact that consumers are holding off spending amid fears about job security.

Alongside the profit warning from Tui this morning, other companies already hit include:

• The UK's biggest care home operator, Southern Cross Healthcare, has seen a reduction in admissions to its care homes from local authorities. As a result of this lost business, the company, which has 730 care homes and 37,000 beds under the Southern Cross and Ashbourne Senior Living brands, will miss analysts' profit forecasts for the full year.

• Construction group Morgan Sindall, which fits out offices and builds schools and houses, warned that government spending is reducing, although the impact is being offset somewhat by growing demand for commercial buildings. Reporting a 3% fall in first-half profit, chairman John Morgan said he reckons the coalition government will reveal cuts of 35-40% in construction funding when it unveils the public sector spending review in October. School and road building will be cut dramatically, he said "and we'll have to wait and see what happens to health and social housing".

• But the shock waves are already being felt in social housing. The most spectacular casualty of the new era of public sector frugality is social housing maintenance group Connaught. In June it warned that some revenues from 31 of about 200 social housing contracts had been deferredstriking amount of cash coming into the business. The company is currently in emergency talks with its creditors about a possible debt-for-equity swap which could wipe out its shareholders. The firm's shares are currently trading at about 11p. Before the profit warning they were changing hands for more than 200p.

• Funding for schools, meanwhile, is also under fire, which last month forced RM Group, the schools IT company, to warn that contracts worth £200m are at risk. RM's shares plunged when the company warned that seven contracts would probably be scaled back after the government axed the Building Schools for the Future scheme, the flagship Labour plan to build new schools and refurbish existing ones. Education secretary Michael Gove said all projects that had not reached "financial close" would be scrapped although there has been a backlash against his plans. Construction firm Balfour Beatty, however, said plans to cut spending on schools would not affect it as it has been positioning the business to take advantage of a construction boom in the power and energy sector.

• In July, Cable & Wireless, which provides communication services to large corporations as well as local authorities and government bodies, saw its shares plunge 17% after warning that spending in the UK public sector had "slowed very significantly".

• Outsourcing group Capita, meanwhile, is hoping that the need of public sector bodies to cut costs could actually result in opportunities for the company. But in the short-term, the company, whose contracts include one with the BBC to collect the licence fee, said last month that "the current pressures on public spending may potentially affect growth … in a small number of our trading activities".

• In early August, Next warned that consumer spending has been slowing down and is likely to be further constrained in the coming months as the government's austerity measures take hold and the forthcoming rise in VAT keeps shoppers away from the high street.

• On the same day, Carpetright admitted there was no recovery in sight for consumer spending as like-for-like sales dipped 3.4% in the 13 weeks to the end of July. Chairman Lord Harris of Peckham said "as announced previously, we had expected consumer demand across Europe to remain subdued as we entered our new financial year, and this view is reflected in the update announced today".

• Just a few weeks after the emergency budget, the new boss of Marks and Spencer, Mark Bolland, warned that it might fall in consumer spending , although at the time he said he did not expect there to be a "double-dip" recession. "We have to be realistic," he said. "The effects of the budget will certainly come back on certain groups of consumers. The impact on some groups will be strong." He added that he was "very cautious" about the UK economic outlook.