A taste of things to come
The hospitality sector (restaurants, cafes, pubs, bars, catering, hotels and other accommodation) bore the brunt of the economic damage inflicted by the third national lockdown in Q1 2021, with a quarterly contraction in output of 18.2%. However, the sector only saw 307 insolvencies in the UK (excluding Northern Ireland) over the same time period. This is 52.6% lower than a year earlier and 34.5% lower than Q4 2020. The latest data shows, however, that there was a pickup between February and March 2021, with 66 and 137 hospitality insolvencies in each month, respectively.
What’s happening in the wider economy?
The latest monthly insolvency data shows that the number of registered company insolvencies in April 2021 was 968, down from a revised 1,047 in March. The April figure is 37.5% lower than the average monthly number of insolvencies in 2019 and 21.5% lower than the average in 2020. This comes despite the fact that the latest data from the Office for National Statistics show that the UK economy shrank by 1.5% in Q1 2021. Therefore, the current data is at odds with the suggestion that insolvencies rise when there is an economic downturn, as weaker demand for goods and services forces some companies out of business.
The fall in GDP in Q1 2021 reflects the impacts of the winter wave of the pandemic, which eventually drove the government to impose a third national lockdown from 5th January. This in turn meant the closure of schools, many hospitality venues, and non-essential shops. While GDP in Q1 was 8.7% below its pre-pandemic level in Q4 2019, the single-month figures suggest that in March, UK GDP was just 5.9% below its February 2020 level. Given the strong growth momentum we are seeing currently, the gap to pre-pandemic GDP levels might well be already eliminated by the end of May.
Cause for concern?
However, considering the wider economic environment for businesses, a cause for concern is the performance of business investment, which fell by 11.9% in Q1. This highlights how the economic uncertainty generated by the winter wave of the pandemic has deterred many firms from implementing investment plans, which could affect the long-term success of businesses.
Another source of weakness for UK business in 2021 is exports, with total exports of goods, excluding precious metals, standing 8.7% lower in Q1 than the preceding quarter. While the pandemic has been the predominant driver of the UK’s economic performance over the past year, the UK’s post-Brexit trading relationship with the EU also came into effect from January.
What is the impact of Brexit?
Many businesses have reported difficulties adjusting to some of the new administrative processes that are now required to trade with the EU, which will have weighed on exports in Q1. However, looking at the monthly figures, these issues seem to have moderated towards the end of the quarter with exports to EU countries partially recovering in February and March. Therefore, this factor will potentially not feed into insolvencies to a significant extent.
Why has there been such a low level of insolvencies in the wider economy?
Company insolvencies have been kept relatively low largely due to significant government intervention with key policies including the suspension of serving statutory demands and the restrictions on winding-up petitions along with the Coronavirus Job Retention Scheme (CJRS).
What is the outlook for the hospitality sector?
An additional 128 insolvencies in hospitality are forecast for April, a key month for the sector as many businesses reopened to visitors. On 12th April, after more than three months of closed doors, England’s pubs, restaurants, bars and cafes were allowed to open, albeit only for outdoor service. Cork Gully’s analysis suggests that restaurants and other dining and drinking venues across England took in £314 million from outdoor customers in the first week post-lockdown.
A further reopening of hospitality occurred in May, allowing for indoor services. Cork Gully estimates that the easing of restrictions from 17th May will cause consumer spending to rise by £836 million per week compared to spending in the weeks prior. Businesses opening in May will also have benefited from the £18,000 restart grant offered by the government. Therefore, in May, Cork Gully forecasts that there will be 105 hospitality insolvencies, which is only 1.2% higher than a year earlier. However other pressures are mounting in the hospitality sector as a consequence of the pandemic with wide spread staff shortages being reported with the inevitable knock on effect on margins.
Mirroring the wider economy, two peaks in the numbers of insolvencies are expected in July and October, caused by the end of the temporary measures contained in the Corporate Insolvency and Governance Act 2020 on 30 June, and the end of the CJRS on 30 September. In July, we forecast 222 hospitality insolvencies (68.1% higher than a year earlier) as businesses have to resume debt repayments. The much larger peak is anticipated to follow in October, with 326 insolvencies (133.1% higher than the same month in 2020).
High numbers of insolvencies are also forecast in November and December 2021, as the impacts of the end of government support measures continue to feed through. 316 and 288 hospitality insolvencies are forecast in November and December, respectively.
Breaking the sector down into accommodation (hotels and other accommodation) and food services (restaurants, cafes, pubs, bars, catering) separately shows that the majority of insolvencies are set to come from the food services sector, with a total of 1,440 insolvencies forecast for the second half of 2021, compared to 109 for the accommodation sector over the same six-month period.
Looking ahead to forecasts for insolvencies in late 2022 and 2023, the number of hospitality business failures is set to return to near pre-covid levels, with an average of 233 per month in the 12 months to March 2023.