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Business failures fall, Opus comments

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Business failures have been climbing inexorably for some two years.  2022 saw the second highest ever annual total and then 2023 snatched the record away from the 2009 peak during the global financial crisis with a national total of 26,595 formal corporate insolvencies. So when the March 2024 figures revealed a sudden and unexpected plunge of 24% year-on-year, we asked Nick Hood, Senior Business Adviser at the Opus Business Advisory Group (www.opusllp.com) whether this is just a blip or the start of a downward trend.

“The dip in insolvencies comes at a time when there has been some more positive news on the UK economy with positive GDP growth in January and February and another fall in inflation in March from 3.4% to 3.2%.  Falling job vacancies and more tolerable levels of pay increases suggests that the troubled labour market could be easing at last.  The overall picture on the economy is not exactly the stuff of economic miracles, but it is better than might have been expected just a few weeks ago.”

“Unfortunately, suggesting that this faintly rosier economic scenario has immediately slashed business insolvencies ignores historical trends.  Typically going back as far as the 1960s, the peak for insolvencies doesn’t hit until between eighteen months and two years after the start of a recession, reflecting the extraordinary ability of SMEs (who account for the vast majority of failures) to somehow struggle on in the face of the most severe financial adversity.”

“Maybe we need to adjust the economic time table to ignore last year’s very shallow recession in H2 2023 and look back instead to the far more catastrophic downturn caused by the pandemic in 2020.  We could measure time from then, but take into account the success of the many government support measures, in particular the Bounce Back Loan Scheme that pumped £47 billion into 1.56 million small businesses.”

“The financial indigestion caused by burdening so many small businesses with so much extra debt will on the one hand have tipped some over the edge as the pandemic continued and they manifestly failed to bounce back.  But at the same time, the Scheme provided desperately-needed cash flow and probably delayed those failures for longer than in more normal times, resulting in an insolvency peak not two years later, but more like three years or longer.”

“The alternative and far more prosaic explanation for the March 2024 reduction could just be the timing of Easter, which started at the end of March this year unlike 2023 when it was later in April.  If the run up to the holiday took out, say, two or three days of insolvency filing activity, this could account for much of the 24% reduction.”

“Things may be a little clearer when we see the April statistics and a lot more obvious when we get the May numbers.  What also needs to be remembered is that despite the drop this March, insolvencies that month were still 46% higher than pre-pandemic on both a monthly and on a rolling 12-month total basis.”