Never mind the weather – Begbies waves red flag over perfect economic storm

As the whole of Britain is hit by Storm Isha, the latest Begbies Traynor “Red Flag Alert” report, which has provided a snapshot of British corporate health for over 15 years, has highlighted the speed at which critical financial distress is growing in the UK after the second consecutive quarter of less than quarter a per cent of growth.

The detailed study of the UK economy reveals that 47,477 businesses are starting 2024 in a precarious financial position of which “a significant percentage” of the businesses identified as being in critical financial distress will enter insolvency over the course of the next year, judging by historical precedent.

Although London seems to have the most businesses in a state of critical distress (14,221), the UK’s regions look to be hit by a wave of insolvencies with high number of stressed companies in the Midlands (5,696), North West (4,951), Yorkshire (3,303), South West (3,271).

And Julie Palmer, Partner at Begbies Traynor, said the end of the era of cheap debt is primarily to blame: “After a difficult year for British businesses that was characterised by high interest rates, rampant inflation, weak consumer confidence and rising and unpredictable input costs, we are now seeing this perfect storm impacting every corner of the economy.

“Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, who loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances.

“For some, a better-than-expected Christmas may kick these concerns down the road for a little longer, but the rapid growth in the levels of critical financial distress point to an economy that is waking up to the danger of debt ladened businesses in a higher rates environment.

“As we saw in the previous quarter, the strain being placed on companies has extended well beyond the consumer facing businesses with bellwether sectors, like construction and real estate, now in serious jeopardy as over 15,000 businesses face high risk of failure.

“Sadly, for tens of thousands of British businesses who should be looking ahead to 2024 with some degree of optimism, the new year will bring a fight for survival as the debt storm that has been brewing for years looks like it is breaking across the country.”

Across every sector monitored by Red Flag Alert, the levels of critical financial distress grew quarter-on-quarter in Q4 2023, highlighting how the current economic backdrop is having a detrimental impact on every corner of the UK economy. 

The key sectors driving this increase continue to be the Construction, Real Estate & Property and Support Services sectors, up 32.6%, 24.7% and 23.6% respectively, alongside Health & Education (+41.3%).

This worrying picture for UK businesses can also be seen in the growing number of businesses in significant financial distress, up nearly 13% in Q4 2023 versus the prior quarter. As at 31 December 2023, well over half a million companies (539,900) were affected. The sectors driving this increase were Construction (+15.3%), Health & Education (+19.2%), Real Estate & Property Services (+21.3%) and Support Services (+9.1%).

Ric Traynor, Executive Chairman of Begbies Traynor, commented: “As we start the new year, the UK economy is in a difficult position after a challenging 12 months for British businesses who had to grapple with a number of unrelenting macro-economic pressures that made the lives of business leaders difficult.

“As a result, we are seeing insolvency rates starting to accelerate in the UK and our own empirical data highlights how this trend is likely to speed up in 2024 as the environment takes its toll on businesses.

“Later this year, we could see some respite for companies as inflation looks like it may reach more palatable levels which in turn should result in interest rates starting to climb down from current heightened levels.

“Unfortunately, there are no signs of an easy fix and, with geo-political uncertainty continuing to rise and a hike in the national wage around the corner, the backdrop is hardly improving for an economy that is still firmly in recovery mode post-pandemic.

“For many businesses, I fear soldiering on in this environment will prove to be one step too far and I expect thousands of debt-laden businesses to start to fail this year.”