In September last year, Cebr predicted that we would see 7,000 companies going insolvent each quarter in the UK in 2024 .
When the data came out for Q4 2023 about a week ago it was clear that we had reached that level already, with 6,788 insolvencies in England and Wales, 314 in Scotland and 81 in Northern Ireland in that quarter.
So is the outlook for 2024 now worse than we had assumed?
On the plus side, as last week’s Forecasting Eye pointed out, economic prospects for 2024 are improving with the likelihood of lower inflation and slightly faster growth. It is also likely that banks now feel more under pressure to justify their actions in closing down a business than they might have felt in the past, especially compared with the 1990s recession when banks would write off an entire sector with very little attention to the underlying profitability of the individual businesses concerned.
On the minus side, the relationship between the economy and companies in financial problems is lagged by about 18 months, so the 2024 improvement is less relevant than one might think. Many of the companies in trouble are indebted as much to their landlords and to HMRC as to their banks. The landlords are mainly in financial distress themselves, though that is partly their own fault for not putting reserves aside for a rainy day during the good years when they were highly profitable. Meanwhile, the HMRC behaves a little like the Post Office in the worst years of ‘Post Office v Mr Bates’.
It is important to understand why UK businesses might go into insolvency. There is a theory that the companies most at risk are so-called zombie companies with high leverage who can pay their interest bills while interest rates are low but who will fail when interest rates rise. This theory was based on analysis of Japanese companies in the early part of this century. When Japanese property prices were sky high, many companies leveraged up their property investment disproportionately to their other activities and got into this situation.
On the whole, this is not the position in the UK, where research (e.g. by Goldman Sachs ) indicates there tends to be a negative correlation between growth and borrowing. The UK’s least lively companies often have a cash cushion. This is partly a reaction to the 1990s when banks’ behaviour to indebted companies was abusive and scarred the thinking of anyone running a business. They simply do not want to be exposed to the whims of banks whose behaviour risked being at best capricious and at worst, as was the case with RBS’s GRG group, downright criminal.
I apologise for bursting the bubble of the zombie company theory, which is widely supported by many monetarists and, though he is always a good counter indicator, former Bank of England Chief Economist Andy Haldane, but it simply is untrue. Indeed, it ought to be obviously untrue to anyone who knows much about how the UK economy operates.
Instead, the companies going bust in 2024 and 2025 are largely ones that got into financial trouble in the Covid years and have never really escaped. Traditionally, construction companies are most at risk of going into liquidation and this has not changed. But both the retail and the hospitality sectors have nearly caught up with construction in terms of insolvency numbers in 2023. This is not surprising given the hits that they suffered during Covid.
Even if Cebr’s forecasts from September 2023 were to be vindicated, UK corporate insolvencies in 2024 would be 28,000 and would be a new record for the post-2013 period for which comparable statistics are available. Our analysis of earlier data suggests that insolvencies during the 1990s crisis will probably have been higher, however.
But given the current momentum and some of the leading indicators, such as court activity, it is likely that the uptick in insolvencies this year will be even stronger than we had assumed. Our central forecast for corporate insolvencies for the year has therefore been raised to 33,000. Our model takes account of the outlook for the commercial property sector, which is currently in tougher straits than we thought previously and is likely to push harder for rent recovery.
Obviously for those involved each company that fails is an individual tragedy, of hopes dashed and of livelihoods damaged, sometimes irreparably. For the business system as a whole, it is part of the process of life, death and renewal and the reallocation of people and resources to more productive uses. It is tragic that life has to be so harsh. But one suspects the alternatives would be even worse.
For more information contact:
Douglas McWilliams, Deputy Chairman
Email: firstname.lastname@example.org, Phone: 07710 083652
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.