7th Jun 2022
1 minute read

What happens when the music stops?

Despite the rise in economic output between Q1 and Q2, corporate insolvencies increased by 31%, to stand at 3,334 across the UK. This rise was higher than previously expected. However, quarterly insolvencies still stand below the average for 2019 of 4,636, down some 28%. Separately, monthly data shows that there were 1,180 insolvencies in July 2021, slightly above the average for Q2.

What is happening in the wider economy?

The UK economy returned to growth in Q2, with GDP expanding by 4.8% compared to Q1, according to the latest figures from the Office for National Statistics (ONS). This followed a quarterly contraction of 1.6% in Q1. Q2’s growth means that output is approaching pre-crisis levels, falling 4.4% short of that witnessed in Q4 2019, the final quarter unaffected by the pandemic.

Positive economic news also came from the labour market data for Q2, with ONS figures revealing that the unemployment rate in the UK stood at 4.7%. This is down on the 4.9% rate in Q1. The employment rate also increased slightly to stand at 75.1%, up 0.3 percentage points on the previous three-month period. Following this latest increase, the employment rate now stands 1.5 percentage points below its pre-pandemic level.

The return to growth in Q2 and improving labour market conditions reflect the loosening of restriction measures that has taken place in recent months. The Government’s roadmap has enabled economic activity to begin to recover from the depths of lockdown earlier in the year, involving a phased reintroduction of many sources of expenditure and business activity.

How have businesses been supported?

Insolvencies tend to rise during economic downturns, as weaker economic activity at an aggregate level translates into lower demand for businesses’ outputs. This relationship has not been witnessed during the Covid-19 pandemic, despite the economy experiencing its largest contraction in modern times. Indeed, insolvencies have actually fallen during this period.

This relatively low number of company insolvencies amid the coronavirus crisis can be attributed to various government interventions. To this end, key policies, and their planned termination dates, include:

–  The Corporate Insolvency and Governance Act 2020: this includes a suspension of serving statutory demands and restrictions on winding-up petitions where unpaid debt is due to Covid-19. Statutory demands will be void if issued against a company in the relevant period. This period has recently been extended, and now encompasses 1st March 2020 to 30th September 2021. Furthermore, the Act also temporarily removed the threat of personal liability if or wrongful trading from directors. This provision was withdrawn at the end of June 2021;

–  The Coronavirus Job Retention Scheme (CJRS), which is set to terminate at the end of September; and September; and

It was announced in June that the ban on landlords evicting firms for unpaid commercial rent was extended for another nine months to 25 March 2022. This will lead to some businesses being protected from insolvency for another nine months. A spate of insolvencies could be seen upon its termination in Q2 2022.

What happens when the support measures end?

After a 31% quarterly rise in insolvencies in Q2 2021, a further rise is forecast in Q3. During this summer period, significant Government support for businesses will remain in place, including the furlough scheme. However, this scheme has entered its tapering phase, making it less attractive for employers. Since July 2021, the level of grant has been reduced and businesses are asked to contribute towards the cost of furloughed employees’ wages.

Furthermore, while the reopening of the economy has allowed businesses such as clubs and theatres to reopen for the first time in many months, the process of opening-up could highlight to some businesses that they are no longer viable in a post-coronavirus world. This could potentially cause a rise in insolvencies prior to the September removal of Government support. Therefore, a total of 3,900 insolvencies are forecast for Q3 2021.

The removal of the furlough scheme and end of the suspension of serving statutory demands and restrictions on winding-up petitions will cause a sharp rise in insolvencies in Q4. Cork Gully forecasts a total of 7,800 for the quarter. Businesses which had been kept afloat by Government support until this time are likely to struggle in the final months of the year

What does this mean for business failures in the UK?

Looking further ahead, insolvencies are set to subside slightly in the early months of 2022, amounting to 5,900 in Q1. Further upward pressure is then anticipated upon the removal of the corporate eviction ban at the end of March 2022. This is set to be a prime factor in the 6,500 insolvencies expected for Q2 2022.An average of 5,900 insolvencies per quarter is forecast for 2022, which is a 34% rise compared to the 2021 average when taking into account the forecast insolvencies in Q3 and Q4. Such a rise in insolvencies is 36% higher than the average 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 customers remain cautious about engaging in social activities despite the lifting of restrictions, these sectors are likely to continue to suffer a loss of business for the coming months.

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