UK business failures – not quite as bad as they look

05 February 2024

A recurring theme in the Monday Briefing over the last year has been the unexpected resilience of western economies, including the UK. Employment has held up surprisingly well, housing markets have softened, not collapsed, and there is little obvious distress in financial markets.

The exception to this story of resilience is business failures. 25,158 registered companies were declared insolvent in England and Wales last year, the highest number for 30 years and more than twice the level seen at the recent low point in 2020. The UK has so far avoided recession, but it is suffering recession-level numbers of insolvencies.

Look beneath the headline numbers, however, and the story looks rather less worrying. Insolvencies have risen, but so too have the number of registered businesses. To get a true picture of stress in the corporate sector we need to look at the rate of insolvencies relative to the population of all businesses (for similar reasons economists focus on the unemployment rate, not the number of people who are unemployed).

The insolvency rate has edged up, from 49.6 failures per 10,000 businesses in 2022 to 53.7 in 2023. This sort of level of failures was last seen nine years ago, in 2014, a less dramatic comparison than the number of insolvencies, which are at a 30-year high. The current insolvency rate is roughly half that seen in the recession of 2008-09. Moreover, insolvencies come from an artificially low base as a result of extensive government support for businesses during the pandemic. It is a measure of the success of the policy that in 2020, a year in which UK GDP contracted by over 10%, one of the worst declines in history, the insolvency rate fell to the lowest level since records began in 1984. From such low levels, and with the gradual withdrawal of government support, it was inevitable that insolvencies would increase.

Even the insolvency rate is a rather unsatisfactory measure of stress since it does not capture the size of businesses that fail. Most businesses are very small, with 44% of the UK’s two million businesses employing one person. Insolvencies have been heavily concentrated among small and medium-sized businesses. Large business failures have been relatively few in number, with perhaps the most well-known including Cineworld (which continues to trade) and the retailers Wilko and Paperchase (both relaunched by new owners as online retailers).

Data from other parts of the economy fit with the story of limited corporate distress among large companies. The redundancies that are the natural counterpart to widespread failures among large businesses have been absent. Bank write-offs of company loans, another indicator of distress, are at low levels. Corporate bond yields are not flashing red in terms of stress in the way they did during the pandemic and the global financial crisis. Corporate profitability has held up well for public companies.

None of this is to understate the pressures many businesses, especially smaller ones, face from high interest rates, elevated energy and wage costs and weak demand. Small firms typically have less diversified revenues, less cash and find it more difficult to access external finance than their larger counterparts. Mindful of such vulnerabilities the government provided especially generous support to smaller businesses during the pandemic. That support is now being withdrawn. The insolvency data show that consumer-facing, interest rate-sensitive sectors have been under the greatest pressure, with the highest rates of failure in the construction, wholesale and retail and hospitality sectors.

Corporate distress seems likely to keep on rising. The latest Bank of England agents’ report notes: “Insolvencies are expected to continue to rise gradually. Distress and company failure are still concentrated among small firms, often linked to pandemic-related debt. Contacts most commonly cite property-related and consumer-facing firms as [being] vulnerable.”

Corporate insolvencies have, indeed, hit a 30-year high. But that dramatic fact conceals almost as much as it reveals about the state of the UK corporate sector. It is in better shape than the headline insolvency data suggest. That is just as well since the pressures facing business are likely to be here for some time to come.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.3% at 7,616.

Economics

The US economy added 353,000 jobs in January, well ahead of expectations, lowering expectations of early US interest rate reductions. The unemployment rate was unchanged at 3.7%
The US Federal Reserve kept interest rates on hold at 5.25%–5.5% and said it was not the “base case” that interest rate cuts would begin in March
US consumer confidence rose in January to reach its highest level since the end of 2021
The Bank of England left interest rates unchanged at 5.25% for the fourth meeting in a row and hinted it may begin to consider rate cuts, noting “good news on inflation over the past few months”
The price of UK carbon emission permits fell to a record low of £31.48 per tonne of carbon dioxide in part due to mild weather and a generous allocation of permits
The International Monetary Fund warned the UK against cutting taxes, saying that planned spending cuts were unrealistic
UK chancellor Jeremy Hunt downplayed reports that the government will cut taxes next month, saying that there will not be “the same scope for cutting taxes in the Spring Budget that we had in the Autumn Statement”
Bank of England governor Mark Bailey said that he did not think that artificial intelligence would be a “mass destroyer of jobs” with a third of businesses telling the Bank that they had made significant investments in the technology in the past year
UK house prices rose by 0.7% from December to January, according to figures from Nationwide
Inflation in the euro area fell to 2.8% in the 12 months to January, down from 2.9% the previous month. Unemployment in the bloc was unchanged at 6.4% in December
The IMF revised its forecast for Russian GDP growth for this year to 2.6%. The resilience of the Russian economy reflects the government’s success in evading sanctions and continuing to sell gas and oil, as well as soaring military expenditure, which now accounts for one-third of government spending

Business

Analysis by The Wall Street Journal shows a marked rise in civil aviation safety incidents in Russia, which the paper links to sanctions that have impeded the airworthiness of Russian aircraft
US oil majors ExxonMobil and Chevron reported strong earnings driven by increasing US oil production despite a fall in earnings from the record levels seen in 2022
Meta, owner of Facebook, Instagram and WhatsApp, announced its first ever dividend and revealed revenue growth of 25% in the fourth quarter, driven by improved advertising performance
Banks in the US, Europe and Japan warned over their exposure to US commercial property, a sector that has been hit hard by higher interest rates and the rise of hybrid working
Last Wednesday saw the introduction of post-Brexit controls on food, plant and animal imports from the EU into the UK. Health certificates are now required on EU goods ranging from cut flowers to fresh produce, including meat, fruits and vegetables. Some industry bodies raised concerns that the rules could cause delays and push up costs
Drink sales in UK bars were down 7% in January, the BBC reports, with the popularity of Dry January identified as a key factor
Research by Kantar Worldpanel found that UK consumers were shifting to packed lunches in a bid to cut costs
The UK government announced it would ban disposable vapes
A US judge struck down a $56bn pay deal agreed with Tesla CEO Elon Musk in 2018, saying it was unfair to shareholders
US commerce secretary Gina Raimondo said that China-made EVs were a national security risk, warning that they might collect data that could be sent to Beijing
A court in Hong Kong ordered the liquidation of distressed Chinese real estate developer Evergrande. It is unclear how much influence the court holds in mainland China

Global and political developments

US president Joe Biden said, “I don’t think we need a wider war in the Middle East” when asked how he would respond to a drone strike that killed three US soldiers
Hungarian prime minister Viktor Orban agreed to stop blocking €50bn of EU aid to Ukraine following significant pressure from other European governments
Russia reacted angrily to news that Ecuador would swap Russian-made military equipment for advanced US hardware so that the US could donate it to Ukraine
Labour shadow chancellor Rachel Reeves pledged that a Labour government would not raise corporation tax above its current rate of 25% in its first term
Over 1,000 tractors blocked roads in Brussels as farmers protested, angry over rising costs, regulations and cheap imports
The Democratic Unionist Party agreed to return to a power-sharing government in Northern Ireland following a deal with the UK government that will reduce trade frictions between Northern Ireland and the rest of the UK

And finally… last week, police in the English town of Hertfordshire stopped a man carrying a fridge on his back, suspecting that he may have stolen the appliance. Runner Daniel Fairbrother was in fact in training for his attempt to run the fastest marathon carrying a household appliance – a chilling discovery

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