UK company insolvencies have swollen beyond financial crisis levels, with figures revealing 25,551 businesses folding over the past year. Sharp increases in interest rates and decreased consumer spending are cited as primary factors.
According to the latest data from the Insolvency Service, 25,551 companies went under in the year ending July, reflecting a 1.4% rise compared to the 25,186 insolvencies during the same period in 2008-09. These numbers underscore the significant pressure businesses face due to the steep rise in interest rates since 2021. Although the Bank of England has gradually increased borrowing costs over the last three years, the full impact on business failures appeared muted until recently. The current data signifies an increasingly severe strain on corporate finances, despite the unemployment rate remaining steady at 4.4%.
Rebecca Dacre, a partner at Forvis Mazars, highlighted the situation by stating, “The latest insolvency figures are a strong reminder that many businesses are still a long way off from recovery. Despite initial signs of improvement in the economy, some sectors are still experiencing severe difficulty as interest rates remain high.” The retail and hospitality sectors have been particularly affected by reduced consumer expenditure, exacerbating the challenges faced during the ongoing cost of living crisis. Survival has become increasingly arduous for businesses within these industries.
In response to these economic pressures, the Bank of England lowered interest rates this month for the first time since March 2020, reducing its base rate from 5.25% to 5%. City traders predict that two additional quarter-point rate cuts may follow within the year. In July alone, 2,150 companies went insolvent, representing a 25% increase compared to the same month in 2023. However, this figure shows a slight decline from the 2,349 insolvencies recorded in June this year, as per non-seasonally adjusted data from the Insolvency Service.
Higher business failure rates typically align with increased unemployment and slower economic growth. However, the UK economy has demonstrated resilience, with recorded growth of 0.7% in the first quarter and 0.6% in the second. During the pandemic, governmental measures aimed at shielding businesses from failure due to lockdowns resulted in a temporary dip in insolvencies. The removal of most of these policies by late 2021 led to a subsequent increase in business failures. Corporate finances remain under strain from rising energy costs, linked partly to Russia’s invasion of Ukraine, and consumer spending that has not returned to pre-pandemic levels.
Sarah Rayment, head of global restructuring at Kroll, offered a glimmer of hope for businesses, suggesting that looser monetary policies and steady economic growth might provide some respite. She commented, “The question is whether they will have enough financial headroom with higher borrowing costs or whether their lenders will give them enough leeway. It is perhaps more likely that we will see more restructuring activity in the near future.”
The rise in UK insolvencies, now exceeding levels seen during the financial crisis, underscores the profound impact of high interest rates and reduced consumer spending on businesses. Continued economic challenges and the cautious optimism about potential monetary policy adjustments suggest further restructuring within the corporate sector may be imminent.