Rocky road ahead as UK insolvencies set to peak

UK companies face another bumpy ride in 2024. Ahead of an expected recovery in 2025, UK businesses must first navigate a year of geopolitical and economic uncertainty, and a heightened risk of non-payment as insolvency rates peak at a 15-year record.

Around 31,000 UK business are expected to fail in 2024, a 10% increase on last year, according to our latest Global Insolvency Outlook. The expected rise would mark the fourth consecutive year of increased business insolvencies for the UK (following a 15% year-on-year increase in 2023, 53% in 2022, and 9% in 2021) and would push business insolvency levels to 43% above 2019 levels, the highest in Europe alongside Ireland.

Last year, which ended with a 50-quarter high in UK business insolvencies, was challenging for various sectors of the British economy. The hospitality industry in England and Wales experienced a 27% increase in insolvencies year-on-year, with 2,418 restaurants alone declared insolvent (that’s more than 6 per day), a staggering 40% increase compared to the previous year. Chemical manufacturing, agricultural, food, and transport sectors all experienced double digit increases in the number of insolvencies in 2023.

After a succession of challenges (Brexit-related issues, Covid-19, inflation and interest rate hikes), UK firms will continue to struggle as the economic outlook for 2024 remains weak. We forecast 2024 GDP growth for the UK at  +0.6% compared with +1.4% in the US and +0.8% in the Eurozone. UK insolvencies will remain high in 2025, although we expect them to fall back slightly (-6% to 29,000) as the economic and financing outlook will only moderately improve.

The UK is not alone in experiencing a rebound in business insolvencies, with several advanced economies facing a noticeable catch-up in 2024. Four in every five countries will see business insolvencies increasing in 2024, with the largest increases likely in the US (+28%), Spain (+28%) and the Netherlands (+31%). Globally, we expect an acceleration of business insolvencies (an increase of +9% year-on-year in 2024), before a stabilisation at a high level in 2025.

Most advanced economies started 2024 with insolvencies already above pre-pandemic levels (the UK was among the first countries in which insolvencies returned to pre-pandemic levels back in 2021). Business insolvencies rebounded in three quarters of the countries we tracked in 2023, with most recording a double-digit increase. Globally, the average increase in business insolvencies accelerated from +23% in 2022 to +29% in 2023, the fastest momentum since 2009 (+33%), the year following the 2008 global financial crisis.

There is cause for optimism. Inflation is falling and the beginnings of a global economic recovery is expected next year. But first, companies in the UK and beyond must survive some significant challenges:

Looming profitability squeeze: While a global and UK recovery is in sight for 2025 (we expect 2025 GDP to grow by 1.5% in the UK and 2.8% globally), firms will first have to manage the deceleration in global demand. Profitability will be under pressure as companies juggle below-trend GDP growth at a time of still-high operating costs, with elevated energy prices, continuing wage growth and lingering supply-chain pressures.

Geopolitical uncertainty: Amid conflicts in Ukraine and the Middle East, the packed election calendar in 2024 will add to economic uncertainty as countries that account for 60% of global GDP head to the polls, including the UK. Political uncertainty will bring complexity and risk to business operations, add costs and disrupt supply chains. We estimate that persistent attacks against shipping in the Red Sea – which accounts for 40% of trade between Asia and Europe – could cut global GDP by -0.4% and cause inflation to increase by +0.5% to 5.1% in 2024..

Tough financing conditions: UK firms continue to face an increased cost of borrowing and limited availability of financing, putting the most exposed sectors and firms at risk: The number of fragile firms in the UK is among the highest among the major European economies at 15%. Cuts to interest rates are expected later this year, perhaps as early as summer, but will remain at relatively high levels. By the end of 2024 we forecast the Bank of England policy rate will stand at 4.5%, down from 5.25% in February.

High risk sectors: The sectors and firms most exposed to the risks of weaker-for-longer demand and prolonged high financing costs are those that rely on discretionary spending, such as manufacturing, retail and hospitality, as well as labour-intensive sectors, such as construction. New businesses established in the wake of the pandemic will also face their first real test of resilience.

As businesses navigate an ever-changing landscape, it becomes crucial to adapt, innovate, and seek support to weather the storm and emerge stronger in the future. There are a number of strategic measures to fortify their defences. Here are three strategies businesses can adopt to mitigate the impacts of rising insolvencies:

1. Diversify your client bases and supply chains: Businesses can act to diversify their client bases and supply chains so they reduce dependency on a single market or supplier. By expanding their pool of customers and putting in place sourcing arrangement with multiple suppliers, companies can mitigate the adverse effects of insolvencies within specific sectors or regions. Although not always an option for companies with highly specialised supply chains, this strategic manoeuvre can enhance resilience against disruptions and bolsters the overall stability of a business’s ecosystem.
   
2. Strengthening financial risk management: Robust financial risk management practices are paramount in safeguarding businesses against the fallout from insolvencies. Enterprises can intensify their efforts to assess, monitor and mitigate financial risks through prudent measures such as enhanced due diligence on potential partners, rigorous credit evaluations and the establishment of stringent credit policies. By adopting a proactive approach to risk management, businesses can pre-emptively identify vulnerabilities among key suppliers and implement appropriate measures to protect their trading networks and interests.
   
3. Protect your business with trade credit insurance: In response to a rising threat from insolvencies, many businesses rely on trade credit insurance as a vital safeguard against potential losses arising from non-payment or default by customers. Trade credit insurance provides your businesses with financial protection and peace of mind by indemnifying you against losses incurred due to insolvency or protracted default. By using the services of an insurer such as Allianz Trade, your company will have access to deep insight into the creditworthiness of your suppliers worldwide, expertise in areas such as risk and cash flow management, and an assurance that you will be paid in full if buyers go under. That safeguards the business’s cash flow, maintains its liquidity, and sustains uninterrupted operations, even in the face of widespread insolvencies.

To find out more about market-leading trade credit insurance from Allianz Trade, contact our specialist team for a free consultation on 0800 056 5452, or get a free online quote today.

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