Mon, 22 Jul 2024 | BUSINESS NEWS
A new report has revealed a considerable increase in the number of UK businesses facing financial distress, with companies continuing to struggle in spite of gradual improvement in the UK economy.
According to the latest Red Flag Alert from Begbies Traynor, there were 601,950 UK businesses in “significant” financial distress during the second quarter of 2024. This represented an increase of nearly 10 per cent from the previous quarter, when 554,554 UK companies were in “significant” financial distress.
Ongoing weak consumer confidence was seen as being among the major drivers behind the increase, with financial distress rising sharply in many consumer-facing sectors, including travel and tourism (up 20.1 per cent), hotels and accommodation (up 16.4 per cent) and bars and restaurants (up 12.2 per cent).
The top five sectors for “significant” financial distress were: construction (89,824 companies); support services (89,763 companies); real estate and property services (65,919); professional services (50,683); and general retailers (42,992).
The latest data again reiterates the fact that, despite the UK economy having stabilised considerably over recent months, hundreds of thousands of businesses remain at serious risk of insolvency.
According to a CEBR report from earlier this year, insolvencies will continue to rise during 2024, with the think tank saying that there is approximately an 18-month lag between economic improvement and a drop in insolvencies. This means that it could be well into 2025, at the earliest, before the recent improvements in the UK economy are felt by struggling business and translate into lower insolvency figures.
This point was emphasised by Begbies Traynor Executive Chairman Ric Traynor, who said that, despite “a greater sense of optimism" in parts of the UK economy, “this is yet to translate into anything meaningful for the hundreds of thousands of businesses fighting for survival.”
He continued: "The situation for many British firms remains grave, with the latest Red Flag Alert data highlighting a substantial increase in the number of businesses in significant financial distress in comparison to this time last year.”
Traynor did say that the recent election had delivered “some political certainty [...] which should result in some momentum starting to build this summer” and that falling inflation would be helpful to businesses, “particularly if interest rates begin to inch backwards later this year.”
However, he conceded that “the prevailing economic situation means that we still expect to see heightened levels of company insolvencies extend into 2025 and beyond."
Begbies Traynor partner Julie Palmer stated that, six months into the year, there were “clear signs that financial distress is growing across almost every sector”, with businesses particularly struggling in consumer-facing industries.
Palmer said that, despite falling inflation, consumers “simply aren't behaving like they used to”, leading to significant challenges for businesses already struggling with higher costs, wage increases and the impact on trading resulting from “one of the wettest summers on record”.
She added: "Additionally, the situation for the consumer remains very precarious. The latest figures from the Bank of England highlights how more than three million households will come off their fixed rate mortgages over the next two years - resulting in substantially higher repayments for many - which will in turn act as a drag on disposable incomes."
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