There may be trouble ahead
There were 14,913 insolvencies in 2021, up by 11% compared to the 13,443 insolvencies recorded in 2020 but still 20% lower than the 18,580 recorded in 2019. Overall, the month with the lowest number of insolvencies in 2021 was February, which saw lockdown measures across the UK, while November revealed the highest number of insolvencies since January 2019. Looking ahead we expect corporate insolvencies to be at around 20,000 in 2022, with a 20% rise in insolvencies forecast between Q1 and Q2 as pressures on businesses are set to rise in April.
What happened to the economy in 2021?
The UK economy in 2021 was broadly characterised by the recovery from the effects of coronavirus lockdowns. Cork Gully estimates that the UK economy grew by 6.8% for the year as a whole, after a 9.4% contraction in 2020. Despite the rise of the Omicron variant at the end of the year, most businesses across the economy were able to fully open for a sustained period of time in the second half of 2021.
However, the reopening of the economy in 2021 didn’t come without difficulties for businesses. In particular, rising input costs have put significant pressure on businesses to raise prices. Inflation measured by the CPI started the year at just 0.7% in January 2021, but the annual measure had risen to 5.4% by December 2021 due to supply chain constraints and rising energy costs.
How were UK businesses being supported?
Businesses remained heavily supported by the Government during much of 2021, having access to the furlough scheme, grants, loans and increased protection from insolvency and eviction.
What did this mean for business failures in the UK?
Despite very difficult conditions, insolvencies fell to low levels in 2020 and early 2021. However, as the Government unwound support throughout 2021, insolvencies rose back to 2019 levels, to stand at 1,791 and 1,588 in November and December 2021, respectively. However, there was no dramatic rise following the end of the furlough scheme and the lifting of restrictions on issuing winding up petitions relating to unpaid debt due to the coronavirus. This may have been due to some support measures remaining in place for businesses, such as landlords being prevented from taking tenants to court for non-payment of rent as well as seizing goods to recover rental arrears. In addition to the temporary increase in the debt threshold for a winding up petition to £10,000, which will be in force until 31st March 2022.
Which businesses suffered the most?
In 2021 most sectors saw an increase in insolvencies, however, the following sectors experienced the highest number of insolvencies:
– Wholesale and retail trade and repair of vehicles; and
– Accommodation and food services activities.
It will also come as no surprise that electricity, gas, steam and air conditioning supply sector insolvencies increased by 75%.
What economic headwinds can we expect in 2022?
Businesses are likely to continue to suffer from rising prices in 2022. We have pushed up our inflation forecasts and now expect annual price rises to peak at 6.4% in April (due to changes in the Ofgem price cap, among other things) but drop closer to 3% by the end of the year. In April, businesses will also face higher employer contributions to employee National Insurance, which will rise to 15.05%.
Key Government measures supporting businesses are also set to end by April. Notably, the ban on landlords evicting firms for unpaid commercial rent which is due to be reversed from March 2022, subject to the Commercial Rent (coronavirus) Bill coming into effect. Government legislation that temporarily increased the current debt threshold for a winding up petition to £10,000 (a significant rise compared to the previous threshold of £750) is also due to end on 31st March 2022.
Therefore, a combination of high inflation, increasing taxes and the ending of Government support could create a wave of insolvencies in Q2 2022.
In order to deal with rising inflation, in its December 2021 meeting, the Monetary Policy Committee (MPC) voted to raise interest rates for the first time in three years to 0.25%, with a further increase on 3 February 2022 bringing the base rate to 0.5%. Despite rising inflation, the Bank’s decision in December 2021 came as a surprise to markets and many commentators given their pre-meeting messages and concerns around the Omicron variant. The increase to 0.5%, however, was widely anticipated. Cork Gully is predicting that there will be another rate hike to 0.75% in August. The increase in interest rates will have a significant impact on businesses repaying loans accumulated in the coronavirus crisis.
The UK unemployment rate stood at 4.1% in the three months to November, 0.1 percentage points below the rate seen in the three months to October, as the labour market continued to show signs of resilience despite the end of the furlough scheme. We expect the unemployment rate to stabilise at 4.0% over the course of 2022. As periods of high business failure rates correlate to rising unemployment, our forecast of falling unemployment despite tough headwinds in 2022 reflects our belief that any increases in insolvencies will not be dramatic.
Cork Gully forecasts business investment will increase by 6.3% in 2022, following a small contraction of 0.1% estimated for 2021. The investment bounce back in 2022 will be supported by labour shortages which may encourage businesses to make the kinds of investment necessary to replace lower productivity workers. There are downside risks to this forecast, however, as record coronavirus infection numbers have hurt business confidence.
Overall, we expect these forces to lead to insolvencies standing at around 20,000 in 2022, with a 20% rise in insolvencies forecast between Q1 and Q2 as pressures on businesses are set to rise in April.