LONDON (Bloomberg) - The number of UK companies missing sales and earnings targets may increase as the government's spending cuts to reduce the budget deficit hit the "fragile" recovery, Ernst & Young said.

While the number of companies issuing profit warnings fell to 45 in the second quarter, the lowest in seven years, from 54 in the previous three months, warnings may increase later this year, Ernst & Young said in a report released in London yesterday.

"The crunch year is 2011," Ernst & Young said. "It is then that the first major wave of fiscal tightening will probably coincide with the first rises in interest rates. It's then that we'll find out how strong the recovery really is."

The Bank of England kept its bond-stimulus plan in place and left its benchmark interest rate at a record low this month to sustain the economic recovery during the UK's biggest budget squeeze since World War II. With the fiscal consolidation threatening to curb activity, the International Monetary Fund this week cut its growth outlook for the UK through 2011.

UK economic expansion slowed to 0.3 percent in the first quarter from 0.4 percent in the last three months of 2009, when Britain exited the recession. Growth accelerated to 0.7 percent in the second quarter, the National Institute of Economic and Social Research said on July 9.

Still, the institute, whose clients include the Bank of England and the UK Treasury, also said the economy faces "headwinds" from fiscal consolidation at home and in the euro area, and there is "clearly a risk that this rate of growth will not be maintained through the rest of this year".

The Office for National Statistics will publish its third estimate for first-quarter gross domestic product (GDP) at 9.30 a.m. today and is scheduled to release its preliminary estimate for second-quarter GDP on July 23.

Contract amendments or cancellations were the main reasons companies cited for profit warnings in the second quarter, Ernst & Young said. Almost 33 percent of companies blamed contract issues, up from 17 percent a year earlier. The percentage citing trading conditions fell to 22 percent from 46 percent a year earlier.

Companies in the travel and leisure industry had the largest number of warnings in the second quarter, followed by support-service firms, Ernst & Young said. General retailers and businesses in the construction and building-material and software and computer-service markets had the next highest level of warnings, the report showed.

"Many companies are now enjoying a trading uplift," Alan Hudson, a partner at Ernst & Young, said in the report. "However, given the potential challenges to growth in the year ahead, companies will need to manage costs and expectations carefully to mitigate a potential stall or stutter in 2011."