The number of UK companies showing signs of significant distress rose to its highest level for at least five years, insolvency experts said on Monday.
Almost 330,000 UK companies reported “significant” financial distress at the end of the second quarter of 2017, a 25% increase over the year, Begbies Traynor reported, most of which were small and medium-sized enterprises.
The insolvency group said this represented the largest annual increase since 2014 and it was the largest number of corporates experiencing significant distress in the five years since it changed which indicators were used in its method of calculation.
Sectors facing the largest increases in ‘significant’ financial distress, with 28,259 real estate businesses and 40,495 construction companies finishing the period distress, providing further evidence of a slowdown in the UK housing and construction markets.
Consumer spending-focused industries have also been squeezed hard during the quarter, with leisure businesses, general retailers, automotive companies and bars & restaurants the worst affected.
“These significant increases in financial distress also point to a slowdown in business investment at a time when the overall growth rate of the UK economy remains stubbornly sluggish,” said Begbies’ executive chairman Ric Traynor.
Julie Palmer, a partner at the firm, added that the quarterly deterioration in the property and construction sectors was particularly concerning, as it raised doubts over whether these firms have strong enough foundations to cope with upcoming headwinds, from Brexit and the rising cost of imported goods to the widening skills gap and its impact on labour cost inflation.
“In the UK’s consumer facing industries, weak real wage growth and rising levels of personal debt continue to put a strain on the retail, bars, restaurants and leisure sectors, where many businesses have been reluctant to fully pass on the inflationary impact of the weakened pound and higher staff costs from the National Living Wage, for fear of losing customers on price in an increasingly competitive marketplace.”
Analyst Neil Wilson at ETX Capital said the insolvency group’s Red Flag report was “usually a pretty good counter-cyclical economic barometer” and something of a red flag for the UK economy.
“What’s also concerning is that the rise in financial distress indicates a slowdown in business investment, which we know is coming under pressure as Brexit uncertainty weighs.
“Insolvencies, the firm’s bread and butter, have been on the slide since the financial crisis. Last year’s numbers were the lowest since 2004 but the ‘good’ news for Begbies is that this is set to rise. The stock has already gained about a fifth in the last month on expectations that more businesses are going to fail this year. Signs of greater financial distress would support this view.”