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Let’s start with some facts. We simply cannot ignore that there is a real issue with insolvencies developing. The fact is that the Insolvency Service recently released figures showing that there were over 25,000 company insolvencies in 2023. It’s not a good number and there is no point in pretending anything else, but one very big number doesn’t tell the full story.
Insolvencies are often considered a sort of barometer for troubled times ahead. As the markets around them become difficult, the companies that sell into them inevitably start to see that reflected in sales. Sadly, some will then struggle financially. When the numbers of insolvencies start to rise in a difficult economy it can be a sort of pilot fish warning that the shark is coming. The oncoming shark would be a continued recession leading to more closures, rising unemployment, increased debt, and ongoing issues with base rates and inflation.
Historically these, and several other unpleasant consequences, would be considered almost inevitable after a statistic such as the 2023 insolvency numbers.
The other big news was that the economy dropped into ‘recession’ in the last quarter of 2023. The economy shrank, which was hardly unexpected, but it shrank by 0.3% which was almost universally higher than expected. This was the second successive quarter with a shrinking economy and that is a widely accepted definition of a full recession period. Recessions mean less spending, less available money, and, yes, of course, that means harder times for businesses and more insolvencies. So, the cycle continues.
Right now, it seems like the downward cycle of recession and insolvencies has started and we all need to accept that things are going to get tough because of it. There is nothing wrong with this and it is perfectly sensible to prepare for the future.
However, there is something else we also need to throw onto the table. This situation is different, very different in fact, so our previous expectations and the lessons of history, may not be quite the benchmark they would otherwise be. Here’s why...
We do love a comparison when it comes to the economy and these last few weeks have produced two very prominent ones.
· The number of company insolvencies in 2023 is the highest since 1993.
· The recession comes at the end of a year of the weakest growth (pandemic aside) since the financial crisis of 2009.
So, what do those comparisons mean? Well, it’s easy to look at those numbers and see only the bad news. If, like me, you are old enough to remember the recession of the 1990s you could be tempted to go and hide in a cupboard until it all goes away. Before we panic though, let’s get some perspective on the two situations.
Firstly, the downturn we are now seeing is not accompanied by some of the other issues surrounding the recession of the early 90s. At that point, there were several factors at play that are not in the current mix. Three of the generally accepted reasons for the problem in the 1990s were high interest rates which, in turn, contributed to a crash in house prices and an overvalued exchange rate. Of course, I am over simplifying the situation down to a few factors, but nonetheless, this is a reasonable assessment of the main issues. Unemployment was also high, which reduced spending across the board, and negative equity in property was quite common.
The interesting thing to take away from our current situation is that most of these are not happening. Interest rates are certainly higher than in the past few years, but they remain stable for the moment, and they are not as high as they have been in the relatively recent past. House prices are a major driver for recession but, despite all the dire warnings, they are currently fairly stable. Unemployment is certainly not high; in fact, the opposite is true.
Insolvencies are undeniably high, but this is following the pandemic, the effects of war in the Ukraine, the sudden hike in inflation, utilities, and fuel prices, and other unusual events. None of these were a problem in the late 90s or the economy of 2008.
Looking at the kind of insolvencies that we are seeing also brings home just how different things are from the 1990s. Many of the insolvencies in the 1993 comparison would have been in manufacturing and related areas. That would mean large numbers of redundancies in a single instance. A larger company closing its doors would often also mean insolvency for suppliers and customers. This time, the kind insolvencies happening are very different, with many being in areas such as hospitality and retail. These will be smaller numbers of people and have less of an overall economic locally. While redundancy is never nice, and I am not downplaying the effect it has on individuals in any way, losing the big employers in the shoe industry in Northampton, engineering firms in Coventry or the decline of the knitwear producers in Leicester, has a heightened effect on communities. Not only that but many of the jobs lost in the 1990s were training and/or industry specific and workers could not easily find replacement jobs. This is not the case now and the silver lining for anyone sadly being made redundant is that the job market is quite buoyant.
I think we need to take the comparisons and the numbers very seriously but also see them for what they are. It may also be good to take the comparisons in particular with a little pinch of salt because those differences we talked about really do matter.
Is it going to get harder? Yes, pretty much without a doubt, things are going to be hard for some time. It’s still a difficult economy and other factors such as it being an election year, the continuing war in the Ukraine, and the seemingly never-ending Brexit wrangling, are not going to go away soon. Our advice is to focus on your business needs. Look at what you can do now and the situation as it is at the moment. Create a plan to shore up the defences against financial problems in the future rather than worry about the past. Comparisons are interesting, but I think we all need practical solutions to the current problems more, don't you?
Over the coming months we will be releasing a series of helpful guides and other information that will be designed to help support businesses with common sense and practical advice. The first batch will be out soon, so you may want to follow us on LinkedIn to keep up to speed.
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