The UK has the highest proportion of “fragile businesses” of any major European economy, another sign of the difficulties Prime Minister Rishi Sunak faces in trying to revive growth.
Around 15% of small and medium-sized businesses in the UK are at risk of defaulting on their debts over the next four years, according to research published today by Allianz Trade. These values are higher than France at 14%, Italy at 9% and Germany at 7%, the credit insurance company notes.
The figures follow official data showing the UK slipped into recession late last year, with many analysts expecting stagnation next year. Sunak, who is trailing the Labor Party in polls ahead of the general election, has made economic growth one of his priorities. He is under pressure to deliver on the tax cuts demanded by his party’s right wing.
But with inflation still above target and interest rates at their highest since 2008, businesses are feeling under pressure. If defaults continue at the current pace in high-risk industries such as construction, real estate, hospitality and retail, which rely on discretionary or labor-intensive spending, Allianz Trade expects more than 7,000 companies will fail in the UK in 2024.
The global picture is also bleak, the insurer said. Global corporate insolvencies are expected to rise 9% this year, after a 29% jump last year driven by the war in Ukraine, high energy prices and the continued withdrawal of Covid pandemic-era support from part of many governments. For 2024, Allianz Trade believes the biggest spikes in insolvencies will be in the United States, Spain and the Netherlands.
“The troubled economy brings with it a variety of obstacles and challenges,” said Aylin Somersan Coqui, chief executive officer of Allianz Trade. “These will now test the resilience of companies that have become the most fragile over the past three years.”
In its latest Global Insolvency Outlook, Allianz Trade warned of a “five-point reality check” weighing on businesses. This included:
- a contraction in profitability as global demand decelerates before a recovery in 2025;
- an increase in uncertainty, caused by issues ranging from geopolitics to the risk of non-payment;
- restrictive financing conditions, as interest rates remain higher than in the recent past;
- a lack of experience among small businesses whose leaders may never have faced such conditions before; AND
- an increase in the number of sectors presenting high risks to employment and the economy.
The increased fragility of businesses is caused by a multitude of factors, the report says, including rising operating costs and the shift to “just in case” inventory management strategies as greater geopolitical risks emerge.