Manufacturing sector still in good shape despite failures – BDO

MANUFACTURING business failures last year hit levels not seen since the early-90s recession, a new report by Midlands’ accountants and business advisors, BDO has said.

Despite the high numbers, the latest Industry Watch study suggests the manufacturing sector is still expected to outperform the rest of the economy in the medium term.

The report shows that around 2,440 manufacturing businesses failed in 2009, an increase of more than a quarter (26%) compared to 2008.  

However, 2010 will see business failures in the sector fall by 35% which BDO said was considerably better than the 14% decline expected for the economy as a whole.  

Tom Lawton, head of manufacturing at BDO, said: “Whilst these figures might appear to show that storms clouds are still gathered over the manufacturing sector, there is certainly a silver lining.  

“Manufacturers are considerably better placed to bounce back than other sectors that are reliant on consumer spending to fuel their recovery.  This coupled with the continued weakness of sterling should see a pick up in international trade and a more positive outlook for manufacturers as the economy rebalances.”

The  total  number  of  business  failures  across all sectors reached  26,165  in  2009  – an  increase  of  16% compared  to  the  previous  year  and  up  by  59% compared to  pre‐recession  levels  in  2007.

Jo Wright, business restructuring partner at BDO Birmingham, said:  “The rise in insolvencies is certainly considerable and equates to 1 in 74 businesses failing in 2009.  

“However, business failures reached their peak in Q1 2009 and since then we’ve seen a downward trend. Historically business failures are lagging indicators and continue rising well after the economy has turned.”

She said the firm was surprised to see business failures rising far less than expectations through this recession and less sharply than during previous recessions.

“Usually there is a strong correlation between economic output and business failures but during the 08/09 recession that relationship seems to have been weakened.

“Surprisingly, businesses have held up better than the economic decline would have suggested,” she added.

According to BDO’s report a number of factors have worked in tandem to mitigate the worst impact on business during this downturn.

It believes 1,600 – 2,000 corporate business failures were avoided due to the ‘time to pay’ scheme that offers struggling businesses the chance to defer tax payments and which was refined in the March Budget.

Also, 3,600 – 4,900 failures were prevented due to falling mortgage and interest costs which boosted disposable income and corporate profitability.

Finally, 800-1,050 failures were avoided due to the impact the reduction in VAT had on consumer spending.

“Other factors that have helped businesses weather this downturn have been that Banks have shown greater flexibility in providing support; we’ve seen more elasticity in the labour market; and, I think on the whole, businesses have learned from the hard lessons of previous downturns,” added Ms Wright.

“However, this is not the time to become complacent. With the economic recovery sluggish at the best, and the uncertainty the Election will certainly create, there is the need for continued support in order to avoid a second wave of business failures.

“A Government of any colour must recognise that enterprise is the UK’s engine room and so any increases in VAT or tax reforms that hinder UK plc’s competitive global standing could seriously upset the apple cart.”