Despite rising insolvency figures in the UK, recent economic indicators suggest a more nuanced picture. John Phillipou, SME Lending Managing Director at Paragon Bank, explores how the current wave of business failures is influenced by enduring economic challenges but is accompanied by signs of recovery and growth.
If you looked at the insolvency figures in isolation, you would be forgiven for thinking that the UK economy is in dire straits.
Government figures show 2,191 company insolvencies across England and Wales in July, 16% higher than the same month in 2023 and more than the average recorded in the pre-Covid period.
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In fact, insolvency numbers are just slightly below the point we saw during the financial crisis of the late 2000s. What marks both that period and the past two years? Severe economic turbulence.
Let’s consider some of the challenges businesses have endured since the turn of the decade.
Covid and its impact on business operations, followed by severe inflationary pressures across everything from energy to labour to supply costs. The introduction of Brexit, which not only had wide-ranging direct implications for those businesses that trade with Europe, but also for others in the supply chain, as well as those that relied on European workers for resource.
Throw in an uncertain political environment and it’s little wonder that exhausted businesses are going to the wall. It’s entirely to be expected and most funders in the market will have anticipated the sharp increase in insolvencies we have experienced during the past couple of years.
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By GlobalDataThe Covid Government support schemes arguably offered a false lifeline to those businesses that were destined to go under anyway and we have perhaps seen the unwinding of that recently, with some of these businesses reaching their natural conclusion.
However, there is strength in the UK economy and business optimism is on the rise.
I spend a lot of time on the road talking to SMEs and the conversations are turning to growth rather than survival. Businesses are starting to invest and are keen to acquire the assets to help grow their companies.
We have a new Government, so there is at last some stability politically. That Government also has a clear growth agenda and has made an encouraging start in terms of laying out its plans to build momentum into the economy.
Inflation is (finally) largely under control, admittedly at the expense of higher borrowing costs, but we would hopefully see more Bank of England Base Rate cuts in the wake of August’s first move down.
And the economy is moving in the right direction, growing by 0.6% in the second quarter of the year, following a 0.7% increase in the first quarter.
Lloyds Business Barometer, a respected measure of company confidence, has shown consistent growth after plummeting in the wake of the mini-budget. Nearly two-thirds of businesses reported stronger trading activity in July, with over half of companies planning to expand their workforce.
So, the positive signs are there. Of course, there are fundamental issues within our economy that we need to address; much of our growth is driven by the service sector and areas such as manufacturing or construction are still struggling to find their feet.
However, whilst we expect insolvencies to remain at elevated levels for some time to come, there are plenty of positives in the economy that will help stronger companies to thrive.
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