The UK will be the first major European economy to reach pre-pandemic levels of business insolvencies

The UK will be the first major European economy to reach pre-pandemic levels of business insolvencies, with a forecast increase of 37% in 2022, according to research from Allianz Trade.

The insurer cites pressures that include the withdrawal of COVID-19 state support schemes, rising inflation (including higher commodity prices), supply chain issues, a slowdown of global growth following the invasion of Ukraine and the lagging effects of Brexit.

These will likely push business insolvencies up significantly in 2022, followed by a further 4% increase in 2023. The rebound in insolvencies in 2021 and 2022 is in contrast to the artificial low recorded in 2020. 

The cause is mainly due to voluntary liquidation proceedings and visible in sectors including utilities, construction, information/communication and business services.

High proportion of ‘fragile’ firms

The UK stands out with a high share of fragile firms (17% compared to 12% in France and 6% in Germany) when looking at profitability, capitalisation and interest coverage recorded in 2021 financials.

Maxime Lemerle, head of insolvency research at Allianz Trade, said: “Our forecasts paint a difficult picture for UK businesses, despite the resilience shown in recent years.

“In a sense, this year’s anticipated uptick in insolvencies is a case of the inevitable after the extensive government support provided since March 2020, but it also shines a light on some of the macro challenges facing the economy.

“A quicker return to pre-pandemic levels of insolvencies compared to similar-sized economies will be a worry for both businesses and the government.

”Yet firms can mitigate the risks posed to them by being vigilant of late- and non-payments, taking regular check-ups on customers’ financial health and assessing the credit worthiness of new clients.

”The outlook promises to pose challenges for UK firms but they’re not impossible to navigate with rigorous financial management in place.”

The UK will outpace its European peers for forecasted business failures, according to Allianz Trade’s research. It expects insolvencies to remain artificially low in Germany, France and Italy owing to ongoing state support as businesses contend with the impacts of the pandemic.

The war in Ukraine and ongoing lockdowns in China will remain the biggest challenges to the global economy. Allianz Trade forecasts overall business insolvencies will increase by 10% in 2022 and 14% in 2023.

It predicts the US will post insolvency increases of 8% in 2022 and 23% in 2023, while China will record 1% in 2022 and 11% in 2023.

One-in-three countries will reach their 2019 insolvencies level in 2022 and one-in-two in 2023, according to the research.