Cork Gully Realises Value for Stakeholders in Destiny Pharma Liquidation
Cork Gully is pleased to announce the successful sale of key assets from Destiny Pharma Limited (in liquidation), an AIM-listed clinical-stage biotechnology company...
UK Insolvency Rate Forecast 2023
Looking ahead to the macroeconomic environment in 2023, businesses are likely to continue to be impacted by inflation, which is expected to remain high. Further quarterly economic contractions are expected after Q3, with four quarters of falling output expected in total.
What is happening in the wider economy?
The UK economy is expected to have entered a recession in the second half of 2022, after a 0.2% quarterly GDP contraction was measured in Q3 and a 0.3% decline is forecast for Q4. GDP is expected to continue declining in 2023, with a 1.6% contraction expected for the year as a whole.
The recession will be driven by a reduction in demand as consumers cut back spending amid the cost-of-living crisis, as prices for essentials rise at a rapid pace. The latest data shows that UK inflation on the Consumer Price Index rose by 10.7% in the twelve months to November. Though this marked a fall of 0.4 percentage points compared to October, it is still over five times higher than the Bank of England’s (BoE) 2.0% target. Cork Gully expects price pressures to remain significantly above the BoE’s target level through the entirety of next year, averaging 10.6% in Q1 2023 and then falling to 5.5% by Q4, causing a headache for policymakers dealing with elevated price pressure during an economic downturn.
In order to try and slow price growth, the BoE has raised interest rates eight times in 2022, lifting the bank rate to stand at 3.5% at the end of the year. Though this will help limit inflation, it pushes up borrowing costs for households and businesses. In particular, households who have mortgages are facing much higher costs. It has also become more costly for businesses to borrow for investment. Next year, Cork Gully expects further rate rises from the BoE’s Monetary Policy Committee, taking the bank rate to 4.5% by the middle of 2023, as policymakers act to get inflation under control.
In line with the pressures faced by businesses amid falling demand and rising costs, as well as the withdrawal of government support for businesses that was in place during the pandemic, there has been a rise in corporate insolvencies in 2021 and 2022.
Between Q3 2021 and Q3 2022 there was a 39% rise in the number of insolvencies in the UK, to stand at a quarterly total of 5,773. Furthermore, the latest monthly data shows that there were 2,167 insolvencies across the UK in November 2022, the highest number since March.
The latest data by sector shows there was a 32% rise in the number of insolvencies in the three months to October compared to a year earlier. The sectors which made up the highest share of these rises in insolvencies were wholesale & retail and food services, which made up 8.2 percentage points and 5.2 percentage points of the increase, respectively. Amid the cost-of-living crisis these sectors are seeing a particular decline in demand, as consumers cut back on discretionary spending. Indeed, the latest retail sales data shows that the volume of retail sales saw a monthly fall of 0.4% in November, bringing sales volumes to a level 0.7% lower than that seen in February 2020.
UK insolvency rate forecast
With monthly data for October and November showing numbers of insolvencies exceeding 2,000 per month, Cork Gully now expects the number of insolvencies in Q4 2022 to stand at 6,200, a 27% rise compared to a year earlier.
As the recession continues into 2023, it is likely that insolvency numbers will continue to rise, as the difficult business environment means that many cannot survive. Cork Gully is expecting the number of insolvencies to rise to 6,300 in Q1 2023, and 6,400 in Q2 2023, before falling slightly towards the end of the year.
Despite the improving business conditions expected towards the end of 2023, the quarterly number of insolvencies are still expected to stand at around 6,000 in Q4, which is far above the quarterly average of 4,600 seen between 2010 and 2019. Of this we anticipate that the quarterly number of administrations will increase, in line with the last recession 2008/9, where on average 20% of insolvencies were administrations. We therefore expect the quarterly number of administrations to rise to 1,200 by Q3 2023. This represents an increase of 300% on pre-pandemic levels (401 administrations in Q3 2019). There were just 265 administrations in Q3 2022 (176 administrations in Q3 2021 and 243 in Q3 2020).
Furthermore, the average quarterly number of insolvencies is expected to stand at 5,900 in 2024, despite the recession coming to end in 2023. Insolvencies can often remain high for many years after a recession, with the anticipated number remaining above 5,000 per quarter on average. As many businesses will often try different strategies to stay in operation before filing for insolvency, as a result it takes many quarters to see a significant fall after a recession.
Businesses in consumer-facing services are expected to see the highest number of insolvencies in 2023, as they see demand decline amid the cost-of-living crisis. This could also impact city-centres with large retail and hospitality industries.