In its latest global report, Allianz Trade anticipates that business insolvencies in the UK will hover around 30% above pre-pandemic levels by 2025, with notable peaks expected in 2024 (29,850 cases i.e. +5%) and 2025 (28,400 cases i.e. -5%).
The rise is primarily attributed to the hospitality, trade, and manufacturing sectors, contributing to an estimated increase of 16% in 2023, equivalent to 3,900 additional cases. Despite all sectors having largely surpassed 2019 levels, the resilience of domestic firms has been strained by successive shocks and challenges, including Brexit-related issues, the COVID-19 pandemic, earlier monetary tightening, and persistent inflation.
The insurer’s latest Global Insolvency Report revealed updated forecasts for 2023 and 2024, with key insights outlining minor rebound in 2022 (+1%) and a surge by +6% in 2023 and +10% in 2024.
The acceleration in insolvencies is driven by a recession in corporate revenues, amplified by reduced pricing power and weakened global demand. The revenue recession, registering a decline of 1.9% year-on-year as of Q2 2023, is pervasive across all regions for the first time since mid-2020. Coupled with high costs, this trend is squeezing profitability and rapidly deteriorating liquidity positions, unlikely to improve before 2025.
Sectors most vulnerable to insolvency include hospitality, transportation, and wholesale/retail, with construction and other sectors catching up swiftly. The higher-for-longer interest rates are reducing demand in sectors such as real estate and durable goods and will start pressuring solvency in highly indebted sectors like utilities and telecom, in addition to real estate, on both sides of the Atlantic.
The report projected that by the end of 2023, a majority of advanced economies will have normalised business insolvencies, with 55% of countries likely to witness substantial double-digit increases. Major economies like the US, France, the Netherlands, Japan, and South Korea are projected to experience significant increases. Globally, three out of five countries are expected to reach pre-pandemic business insolvency levels by the end of 2024, including significant markets such as the US and Germany.
Furthermore, in a scenario of slowing global economic growth, payment terms are expected to lengthen, exacerbating insolvency rates in the coming quarters. Global Days Sales Outstanding already exceed 60 days for 47% of firms, making timely payments increasingly challenging and adding pressure on financial stability. Closing the resulting financing gap could pose a significant challenge, especially with bank loans drying up for small and medium-sized enterprises (SMEs).
“Companies still have a sizeable amount of excess cash, €3.4 trillion in the Eurozone and US$2.5 trillion in the U.S. But these cash buffers remain highly concentrated in the hands of large firms and in specific sectors such as tech and consumer discretionary. And in general, most companies are unable to increase their cash positions through operations in the context of lower-for-longer economic growth. All in all, we expect two accelerations in global business insolvencies, with +6% in 2023 and +10% in 2024, after +1% in 2022,” Allianz Trade CEO Aylin Somersan Coqui said.
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