Death by a thousand cuts
The latest sector-based insolvency data reveals that the manufacturing sector saw a 73% rise in the number of insolvencies in the three months to July compared to the three months to April. Supply chain disruptions and the high costs of raw material are set to continue to plague the sector. We are therefore likely to see a significant increase in the number of insolvencies in the manufacturing sector in the months to come.
What is happening in the wider economy?
According to the latest figures from the Office for National Statistics (ONS), the UK economy grew by just 0.1% in July, the slowest monthly growth rate since January, when the economy contracted by 2.7%. A key factor in this poor economic performance will have been the ‘pingdemic’, as July was marked by a surge in coronavirus cases, causing the number of people having to self-isolate due to being exposed to someone with coronavirus to rise dramatically. As a result of this some businesses struggled to find sufficient workers for shifts while overall demand will have also suffered. Indeed, the latest data shows that there were 1,183 insolvencies in the UK in July, which increased further to 1,446 in August.
How are businesses being supported?
The Corporate Insolvency and Governance Act 2020, which includes a suspension of serving statutory demands and restrictions on winding-up petitions where unpaid debt is due to Covid-19, is set to end on 30th September 2021. However, it was announced earlier this month that the Government plans to introduce new legislation that will temporarily increase the current debt threshold for a winding up petition to £10,000, which will be in force until 31st March 2022 with a requirement to consult with the debtor for at least 21 days.
The ban on landlords evicting firms for unpaid commercial rent was also extended earlier in the year until March 2022, further protecting businesses. The ban stops landlords taking tenants to court for non-payment as well as seizing goods to recover rental arrears.
The termination of the Coronavirus Job Retention Scheme (CJRS) will place significant financial pressure on businesses which have come to rely on government support to supplement workers wages. Therefore, we could see insolvencies rise in October as a result. The latest government figures show that there were 484,000 employers with 1.6 million staff on furlough on 31st July 2021. Yet, despite this continued widespread use of the furlough scheme, many businesses are struggling to find the staff they need. There were an estimated 1.0 million job vacancies in the three months to August, surpassing the previous record high set in the three months to July. Particularly strong growth in the number of vacancies was seen in the transport & storage and accommodation & food services sectors, where quarterly growth rates of 76.3% and 75.4% were seen in the three months to August, respectively.
What is the outlook for the manufacturing sector?
In year-on-year terms, the 330 insolvencies in the three months to July 2021 were up by 23% compared to the 268 in the same period in 2020.
The manufacturing sector has experienced many pressures resulting from Brexit in 2021. The end of the transition period in December 2020 has driven up fees associated with cross border trade, despite the free trade agreement in manufacturing between the UK and EU, due to increased red tape and bureaucracy.
However, overshadowing the impact of Brexit on manufacturing businesses is the impact of rapidly rising raw material costs as well as global supply shortages, which will have particularly affected businesses in this sector. There are many interplaying forces contributing to this disruption, including international shipping delays, rising coronavirus restrictions in some countries, as well as rising demand in countries which have loosened restrictions.
The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index fell to a five-month low of 60.3 in August, highlighting these constraints caused by global supply chain shortages as well as the impacts of Brexit (although the index is still in expansionary territory). The survey also highlighted the extent of the supply chain issues, with average supplier lead times lengthened to the second greatest extent in the survey history during August. The only time when delivery delays have been more pronounced was in April 2020, during the first coronavirus lockdown. Therefore, these pressures are likely to have contributed to some businesses filing for insolvency over the summer months.
In September alone, we have seen soaring gas prices leading to a shortage of CO2, a key input into food manufacturing. This will have increased pressure on businesses in this sector even further, meaning we could undoubtedly see more insolvencies in the food manufacturing industry in the months ahead.