The slight respite this quarter could continue into Q4 based on County Court Judgements (CCJs), which show the number of creditors attempting to recover debts, and tend to predict insolvencies. Total CCJs in England and Wales fell 18% in Q3 2022 compared to the same period last year, according to Registry Trust figures. Business judgments decreased by 5%, and average business debt fell by 28%.
Get ready for profit shocks as UK insolvency rates rise
But our researchers predict a further spike in business failures next year, with the biggest cause of business insolvencies likely to be the energy crisis causing a massive profitability shock for UK businesses.
Most firms can afford to pass on a quarter of energy price increases to their customers, and withstand any price increase below 50%.
However, this pricing power erodes as energy rationing and high inflation continues. A large chunk of profits could be wiped out for many companies. Even worse, if the UK experiences blackouts this winter, UK insolvency rates could rise to 17% (42,000), say our experts.
High interest rates and wage bills could also damage profits. In 2023, a rate hike of 2% could dent UK profit margins by 2.2%. This would endanger many sectors, including construction, transportation, telecommunications, machinery and equipment, retail, household equipment, electronics, automotive and textiles.
The fiscal backdrop will only add to these pressures as most working families and businesses will be worse off after the austere measures announced in the Autumn Statement.
These planned tax rises will hit the disposable incomes of consumers who are already stressed by rising prices and mortgage payments, so we can expect weaker consumer spending and corporate sales figures.
Inflation and higher interest rates are already affecting the UK economy, which contracted 0.2% between July and September, according to ONS figures.
This drop is likely to become more severe and protracted, with UK insolvency rates rising again in 2023. Only then are the government and central bank likely to return to a more supportive approach to avoid insolvency levels approaching those experienced in 2009.
This policy pivot is expected to happen around the middle of 2023, allowing some improvement in corporate performance in the second half of 2023.
UK sector breakdown
In England and Wales, government statistics show UK insolvency rates hit one in 213 active companies (0.47%) in the 12 months to 30 September 2022. That’s a significant increase from the 0.29% of active companies that failed in the previous 12 months.
The hardest hit sector was construction with 3,949 insolvencies (19% of cases). Wholesale and retail trade (14% of cases) jumped into second place above accommodation and food services (12%).
The construction industry typically has the highest insolvency rates of all sectors, but all industries experienced higher rates in the 12 months ending Q3 2022, compared to the previous 12 months.
How Allianz Trade insurance can help
The failure of other firms is a significant risk to yours, as they may not be able to pay what they owe you. Even worse, you could get caught in an insolvency domino effect, in which the impact of one bankruptcy ripples across supply chains.
Industries such as construction are particularly vulnerable to this effect due to the many layers of subcontracting.
The risk of a liquidity crisis is further compounded by many firms still trying to accelerate growth to make up for opportunities lost during the pandemic. Though their business activity may be robust, working capital is under pressure, increasing the risk of default.
Allianz Trade’s credit insurance can help your firm minimise the risk of bad debt as UK insolvency rates continue to climb. It protects against customer default and supports your growth by enabling order volumes from new, creditworthy customers to rise quickly.
Our global network and services enable your firm to unlock and protect cash flow while reducing costs and minimising liquidity risks in your supply chain.
