The number of UK businesses in significant financial distress in the first quarter of 2019 has increased, while those under critical distress has ramped up by 17% on last year’s levels. According to a new study, some 484,000 businesses are vulnerable, thanks to a perfect storm of economic and geo-political uncertainty.
Over the last three years, flagging consumer confidence has been dented by stagnating pay, while the price of many products and services has been hit by inflation, thanks to rising import prices relating to the ailing pound. While increasingly high employment has helped to mitigate some of this impact, hiring intentions have cooled in 2019 as the country braces for the impact of Brexit – suggesting that the number of insolvencies may well spiral further upward over the coming 12 months.
At the turn of the year, Begbies Traynor found that a concerning leap had occurred, with 15,000 additional firms admitting financial distress during the final quarter of 2018. The report found that the number of businesses in significant distress across the UK stood at 481,000. Should things not improve drastically, the figures point to a probable boom in bankruptcy & restructuring service demand, even if only half of those firms are forced into insolvency proceedings.
Unfortunately, according to the latest Red Flag Alert from the insolvency consultancy, things have only become worse in the first half of 2019. Begbies Traynor has issued a warning that as many as 16% of UK businesses were in financial distress at the end of March. 484,000 businesses are now in an increasingly vulnerable state, while the number of businesses in “critical distress” – which Begbies Traynor noted can be seen in many cases as precursor to formal insolvency – rose by 17% year-on-year.
It is not only the beleaguered retail sector which accounts for this rise, either. The UK’s financial sector has seen a 5% increase in the number of businesses under significant distress to 12,728, with the study citing Brexit uncertainty as a significant factor. The level of optimism among the UK’s financial services sector remains at a worrying low, with regulatory demands and uncertainty surrounding the UK's impending exit from the EU having a major impact on the sector’s buoyancy.
At the same time, the property sector was the most affected, recording a 12% increase of firms in financial distress. It was followed closely by the construction sector – which saw a 10% increase – despite both firms reporting improved demand from foreign clients due to the lowered value of the pound. Julie Palmer, partner at Begbies Traynor, suggested that Brexit and sluggish wage growth had led to consumers and businesses alike tightening their belts, putting many businesses under strain.
Palmer explained, “This trend is reflected in our latest Red Flag research which clearly shows that capital intensive sectors – such as construction and property – are suffering as both business and consumers have taken a cautious approach and limited their exposure.”
The news comes as Big Four firm KPMG has also issued a stark warning on the state of the UK economy. According to a recent study from the firm, a rising number of underperforming “zombie firms” are creating a major drag on the UK economy, and threaten to exacerbate a future downturn. KPMG’s figures claimed as many as one in seven UK firms could be “under sustained financial strain”, adding they had been able to “stagger on” partly thanks to low interest rates. KPMG warned these struggling firms may be crowding out healthy rivals, when under more normal economic circumstances they would probably have ceased trading.