0 likes38 views

UK insolvencies surpass financial crisis levels as interest rates squeeze businesses

August 20, 2024

The number of UK companies falling into insolvency over the past year has surpassed the levels seen during the 2008 global financial crisis.

According to the latest figures from the Insolvency Service, 25,551 companies went under in the year leading up to the end of July, a 1.4% increase compared to the 25,186 insolvencies recorded during the same period in 2008-09.

These figures highlight the mounting pressure on businesses as a result of the sharp rise in interest rates since 2021. Although the Bank of England has been raising borrowing costs for nearly three years, the impact on business failures had been somewhat subdued—until now. The latest data suggests that the strain on corporate finances is becoming increasingly severe, despite the unemployment rate holding steady at 4.4%.

Rebecca Dacre, a partner at Forvis Mazars, commented on the situation, saying, “The latest insolvency figures are a strong reminder that many businesses are still a long way off from recovery. Despite initial signs of improvement in the economy, some sectors are still experiencing severe difficulty as interest rates remain high.”

The retail and hospitality sectors, in particular, have been hit hard by reduced consumer spending during the ongoing cost of living crisis. These challenges have made survival increasingly difficult for many businesses in these industries.

In response to the economic challenges, the Bank of England lowered interest rates this month for the first time since March 2020, reducing its base rate from 5.25% to 5%. City traders anticipate that the Bank will implement two further rate cuts this year, each by a quarter-point.

In July alone, 2,150 companies went insolvent, marking a 25% increase compared to the same month in 2023. However, this figure was down slightly from the 2,349 insolvencies recorded in June this year, according to non-seasonally adjusted data from the Insolvency Service.

A rise in business failures is typically associated with higher unemployment and slower economic growth. However, the UK economy has shown signs of resilience this year, with growth of 0.7% and 0.6% in the first and second quarters, respectively.

During the pandemic, the government introduced measures to protect businesses from failure due to lockdowns, resulting in a temporary decrease in insolvencies. However, the removal of most of these policies in late 2021 led to a surge in business failures.

Corporate finances continue to be squeezed by a combination of rising energy costs, partly due to Russia’s invasion of Ukraine, and consumer spending that remains below pre-pandemic levels.

Sarah Rayment, head of global restructuring at Kroll, expressed cautious optimism for businesses, noting that looser monetary policy and steady economic growth could offer some relief. “The question is whether they will have enough financial headroom with higher borrowing costs or whether their lenders will give them enough leeway,” she said. “It is perhaps more likely that we will see more restructuring activity in the near future.”