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.