New data has revealed that the number of UK companies in “significant” financial distress was up more than 30 per cent year-on-year in the first quarter of 2024, with the macroeconomic challenges that businesses faced in 2023 continuing during the first three months of the year.
According to the latest Red Flag Alert from Begbies Traynor, the number of UK firms in significant financial distress stood at 554,554 in Q1 2024, up 30.8 per cent from 424,041 in Q1 2023, driven in particularly by major increases in the construction (up 38.6 per cent), food and drug retail (40.8 per cent) and general retail (38.7 per cent) sectors.
While the increase was most pronounced in these sectors, all 22 sectors covered by Begbies Traynor showed an increase in significant financial distress over the course of the year.
Begbies Traynor Partner Julie Palmer commented that, despite optimism at the outset of the year, 2024 has been characterised so far “by a continuation of the same pressures that plagued companies in the UK throughout 2023.”
Palmer continued: “Since the pandemic, hundreds of thousands of UK businesses depleted their financial reserves and loaded their balance sheets with increasingly unaffordable debt which for many may simply be too great to bear.”
“As with the prior quarter, the picture is particularly concerning in the consumer facing sectors. We are starting to see this translate into larger companies entering insolvency, a trend that I expect to continue while consumer confidence remains uncertain. On top of that, the higher levels of financial distress in bellwether sectors such as real estate and construction point to a troubled UK economy.”
There was also a 20.1 per cent year-on-year increase in businesses facing more serious “critical” financial distress, with 40,174 UK companies affected. While this was down 15.4 per cent from Q4 2024, it points to UK insolvency levels remaining at historically high levels. Close to 50 per cent of companies in critical financial distress were from the construction, real estate, financial services and support services sectors.
Many of these businesses are expected to fall into insolvency over the next year and Begbies Traynor’s research indicates that a significant percentage of companies in significant financial distress are also likely enter critical distress and possibly insolvency should the economic backdrop fail to improve.
Julie Palmer stated that many companies will be hoping that the Bank of England makes a “meaningful” interest rate cut later this, but cautioned that this is unlikely to happen in the near-term, due to higher-than-expected inflation.
She added: “All of this means that these pressures are here to stay, and I fear this will result in thousands of businesses failing in the coming months as the constant pressures will become too great for many.”
Begbies Traynor Executive Chairman Ric Traynor stated that macroeconomic conditions were being compounded by growing geopolitical instability, which was preventing the UK economy from picking up momentum post-COVID-19.
Traynor added: “The UK economy is in a precarious enough position as it is, and further instability could cause fuel prices to rise markedly, increasing inflation and slowing the appetite for the predicted cuts to interest rates.”
“Unfortunately, there’s no quick fix for our economy and with inflation falling slower than expected, hope of the Bank of England cutting interest rates significantly in the near future seems to be fading.”
“Sadly, the pressing issues facing businesses today will simply push many over the edge and contribute to the current high level of UK corporate insolvencies.”
As a growing number of UK companies fall into financial distress and insolvency, the chances for buyers to make opportunistic acquisitions will continue to increase. However, in the face of ongoing economic uncertainty, the need to undertake solid due diligence will remain paramount.
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