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Energy Prices are a Key Source of Inflationary Pressure in the UK
Insolvencies are likely to be witnessed across a range of sectors over the course of the year, as prices rise across the economy. However, with energy being a key source of inflationary pressure, businesses which particularly rely on the purchase of oil and gas for their day-to-day running, such as manufacturers are set to be more impacted.
What is happening in the wider economy?
UK GDP grew by 1.0% in Q4 2021, unchanged from the downwardly revised 1.0% increase seen in Q3 2021. However, this overall growth rate masks a 0.2% contraction in December 2021. Amongst the major sectors, services output was the main contributor to December’s fall, with the industry contracting by 0.5% in December. Much of this fall in services output can be attributed to the omicron wave of coronavirus which hampered footfall and led to reduced consumer demand. Despite the weak end to the year, the UK economy is estimated to have grown by 7.5% over the course of 2021, marking the strongest pace of annual growth since 1941. More recent data reveals that GDP expanded by a solid 0.8% in January, the fastest monthly growth rate since April 2021, as the country recovered from December’s omicron wave.
The resilience of businesses and the wider economy to the end of the furlough scheme, among other government schemes, is highlighted by recent labour market data. The UK unemployment rate fell to 3.9% in the three months to January 2022, according to data released by the Office for National Statistics (ONS). The unemployment rate is now in line with the rate observed in the three months to February 2020, before the onset of the pandemic. This comes despite the uncertainty caused by the spread of the omicron variant over the winter months.
Looking ahead to the macroeconomic environment in 2022, inflation is set to be a key theme impacting businesses, which has been exacerbated by the Russian invasion of Ukraine. The latest data shows that the consumer price index (CPI) measure of inflation stood at 5.5% in January, up from 5.4% in December and is at its highest rate since March 1992. Moreover, inflation is set to accelerate further in the coming months, in light of the situation in Ukraine. The conflict and the associated sanctions have placed upward pressure on energy prices, as well as the cost of other commodities including agricultural exports such as wheat. CPI inflation is now set to accelerate to 8.2% on an annual basis in April, as the rise in the Ofgem energy price cap is also set to impact households and businesses when paying their energy bills. Given sustained pressure on energy prices, which will be reflected in households’ utilities and transport bills, as well as mounting food price inflation, we now expect inflation to average 6.5% over the whole of 2022.
What does this mean for business failures in the UK?
Despite the UK’s strong recovery from the effects of the pandemic, there was a rapid rise in insolvencies, mainly liquidations, in Q4 2021, with quarterly data revealing a total of 4,862 insolvencies in the final three months of the year, up from 4,159 in Q3. This is the highest quarterly number of insolvencies since Q1 2014.
The main driver behind the sharp rise in the number of insolvencies has been the termination of various forms of government support that have protected businesses from needing to file for insolvency over the course of the pandemic. However, with insolvencies only standing 8.8% higher than in Q4 2019, the pandemic support measures have likely paid a substantial role in preventing a greater number of businesses declaring insolvency than we would have otherwise expected to be the case.
The latest monthly insolvency data show that insolvencies in January and February 2022 stood at 1,634 and 1,606, respectively. Our forecast for Q1 2022 as a whole stands at 4,800. However, insolvencies are then set to rise again in Q2 2022, to 5,400 and average 5,200 per quarter across the second half of the year.
Inflation is set to reach a new peak in Q2, which may lead to a higher number of business insolvencies as operating and input costs increase. In addition, the temporary increase in the debt threshold for a winding up petition is set to return to £750 on 1 April 2022. Meanwhile, the Government is also set to raise the rate of National Insurance in April, including employer contributions. Therefore, the cost of hiring an employee for a given wage rate will rise for all businesses.
We’re expecting the number of insolvencies to rise slightly further in 2023, averaging 5,300 per quarter, as inflationary impacts are set to continue to impact household spending power and businesses directly.
Which businesses will suffer the most?
Insolvencies are likely to be witnessed across a range of sectors over the course of the year, as prices rise across the economy. However, with energy being a key source of inflationary pressure, businesses which particularly rely on the purchase of oil and gas for their day-to-day running, such as manufacturers are set to be more impacted.