There were over 6,700 business insolvencies in Britain in Q2 2023, more than double what was seen in a typical quarter during the pandemic, though during that period businesses were largely protected from insolvency through a range of measures. However, even compared with a more normal period these are up by 50% compared with the same quarter in 2019. For comparison, the number of quarterly insolvencies averaged 4,100 between 2015 and 2019.
The previous peak (before Q2 2023) in quarterly insolvency levels was in 2009, during the financial crisis. Even if we take account of the fact that some of the more recent insolvencies are businesses that might have collapsed in 2020 and 2021 (if there had not been pandemic-induced government support) insolvencies are reaching worrying levels.
The high level of business failures follows headlines that include the collapse of retailer Wilko and construction company Buckingham Group as well as warnings of the risk of bankruptcy at shared office provider WeWork.
As Cebr warned back in 2020[1], many businesses took on debt during the pandemic in order to survive, particularly in sectors such as retail and hospitality. These businesses saw a post-pandemic boom in demand, but many are likely to still be repaying loans.
Such businesses paying back loans will be struggling amid the high interest rate environment. The Bank of England has raised its main policy rate from 0.1% in December 2021, to now stand at 5.25%. Higher borrowing charges add to the costs faced by businesses already paying loans, and also deter investment in new projects and equipment. Cebr is currently forecasting further rate rises from the Bank of England to a peak rate of 5.75%, meaning the worst is yet to come in terms of borrowing costs, quite apart from the impact of fixed term loans made when interest rates were lower being rolled over at the new higher rates.
Moreover, businesses continue to face weaker demand from the cost-of-living crisis. Though the UK economy has shown a lot of resilience to the impacts of the high rates of inflation seen in 2022 and 2023, growth in GDP remains very weak, with just 0.2% growth in Q2 2023.
Breaking down the latest Insolvency Service data by sector shows that food services, retail and construction have made the biggest contributions to the rise in insolvencies over the past year. Overall, there has been a 17% annual increase in the number of insolvencies in Britain in Q2. The food services sector reported a 57% increase over this period, with over 900 insolvencies in Q2, accounting for over a third of the overall increase in insolvencies. In addition, the retail sector saw a 22% increase over the past year to see over 1,000 insolvencies in Q2, while the construction sector reported an 10% increase to nearly 1,200.
This rise in insolvencies may be indicative of a wider downturn in the economy. If large investments in projects are being delayed, likely due to high borrowing costs, and businesses are collapsing, there will be impacts felt throughout the economy, from suppliers of materials to workers losing their jobs.
Looking ahead to the future, Cebr expects the rate of business insolvencies to remain high as interest rates continue to rise, pushing up debt repayments to unsustainable levels for some businesses. Our models suggest that there could be 7,000 insolvencies per quarter on average across 2024. Furthermore, Cebr is forecasting a recession in the UK, with two consecutive quarters of contraction in GDP in Q4 2023 and Q1 2024.
In line with our forecast of a recession, we may see the Bank of England start to cut interest rates next year, in an attempt to restimulate demand. However, even if the Bank starts to reduce its base rate, interest rates will still stand far above recent norms for some time. As such, a recovery in businesses’ willingness to invest may take some time, meaning a tricky trading period until then.
Figure 1: Percentage point contribution to 17% annual rise in business insolvencies in Q2 2023
Source: The Insolvency Service, Cebr analysis
For more information, please contact:
Josie Anderson, Managing Economist and Deputy Head of Forecasting and Thought Leadership
Email: janderson@cebr.com, Phone: 020 7324 2864
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.