One swallow does not make a summer
The resilience of businesses despite the end of the furlough scheme and Corporate Insolvency and Governance Act, and despite a tough business environment, is highlighted in the fact that the number of UK company insolvencies fell from 1,530 in September to 1,487 in October. However, the underlying trend in corporate insolvencies remains an upwards one. Corporate insolvencies in October still stand 29% higher than the average for the year so far. Although, insolvencies in October stood 8% below the October 2019 figure.
What is happening in the wider economy?
According to the latest figures from the Office for National Statistics (ONS), UK GDP grew by 1.3% in Q3 2021, slowing from 5.5% in Q2. Monthly data shows that GDP growth improved throughout the quarter; after a 0.2% contraction in July, there followed a 0.2% rebound in August and finally 0.6% growth in September. If the economy maintains this recent momentum and grows by another 0.6% in October, then it would reach pre-pandemic levels of output (February 2020), however, the economic environment for businesses remains challenging. Inflation is high, especially in terms of the cost of inputs for producers, with annual producer input price inflation standing at 13.0% in October. Additionally, with the number of vacancies reaching another record high in the three months to October, at 1.2 million, businesses are finding it increasingly difficult to hire workers
How have businesses been 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, ended on 30th September 2021. However, the Government introduced 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. This is a significant rise compared to the previous threshold of £750.
The ban on landlords evicting firms for unpaid commercial rent was also extended earlier in the year until March 2022, further protecting businesses. This 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) in September is likely to have placed financial pressure on businesses which have come to rely on the income it brings to support worker wages. The latest government figures show that there were 1.1 million staff on furlough on 30th September 2021. Yet, despite the continued significant use of the furlough scheme upon its termination, the ONS initial estimates in fact suggest an increase in the number of employees in the UK between September and October of 160,000. Furthermore, the ONS surveys of employers who still had staff on the scheme at the time of its termination have shown encouraging results, with 65% of previously furloughed employees returning to their usual level of hours once support was withdrawn.
What does this mean for business failures in the UK?
Cork Gully forecasts suggest that the removal of Government support, and an increasingly tough business environment, will have an impact on the number of insolvencies in the November and December data. That said it appears that businesses have been fairly resilient, therefore, we are expecting the figure in Q4 to total 5,500, which is less of a sharp rise than previously expected.
We’re expecting a larger spike in insolvencies to occur following the reduction of the debt threshold for a winding up petition from its current £10,000 level, as well as the end of the eviction ban. These will both occur at the end of March, such that in Q2 2022, a rise in insolvencies is likely, with our forecasts putting the figure at 6,000.
Looking ahead to 2022, an average of 5,700 insolvencies per quarter is forecast, a 46% rise compared to the 2021 average, and 22% higher than the number of insolvencies in 2019. A further 4% rise in the number of insolvencies is expected in 2023, 26% higher than in 2019.
Which businesses will suffer the most?
Insolvencies remain most likely in sectors that have been hardest hit by the pandemic, such as food services and arts, entertainment and recreation. If the continued spread of coronavirus, especially over the winter months, causes customers to remain cautious about engaging in social activities despite the lifting of restrictions, these sectors are likely to continue to suffer a loss of business.