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|UK insolvencies set to rise for first time in four years|
|Thursday, 05 November 2015|
In 2016, instability in emerging markets is set to end six consecutive years of decline in global insolvencies, according to Euler Hermes with the UK suffering an increase in bankruptcies for the first time in four years.
The Euler Hermes Economic Outlook 2015-16: The insolvency U-turn predicts that worldwide insolvencies will stabilize at 300,000, with the UK experiencing an increase of +5% to 22,070 failures.
This contrasts with the UK seeing a forecast decrease of -9% to 21,100 in business insolvencies in 2015, down from 23,098 in 2014. Companies' payment behaviour is already showing signs of deteriorating. Days Sales Outstanding (the difference between invoices being submitted and being paid) are expected to reach 56 days in 2015, two days more than in 2014 and one week longer than in 2011.
"Slowing GDP growth and long-lasting low inflation are weighing on UK firms' turnovers," said Ludovic Subran, chief economist at Euler Hermes. "Rising wages and the strengthening of the pound are triggering a loss in companies' competitiveness and are a significant contributing factor to the increase in insolvencies. The anticipated rise in interest rates, strong uplift in new business creation since 2012, and uncertainty around the "Brexit" question will also all soften domestic confidence."
The global trend, which saw a healthy decline in insolvencies of -14% in 2014, continues into 2015 but loses momentum in line with the global economic slowdown. As a result, Euler Hermes estimates that its Global Insolvency Index will decrease by only -4% this year. Despite six consecutive years of decline, the positive trend was not robust enough to offset the sharp hike in bankruptcies recorded between 2007 and 2009, so the Global Insolvency Index remains higher by 3% than its pre-crisis average.
“After a five year love story with the fastest-growing part of the world, time has come for a reality check,” continued Subran. “Large current account deficits, a vulnerable private sector and a highly politicized reform agenda created a perfect storm for emerging markets. Capital outflows, volatility and credit risks are on the rise.”
The divergence between advanced economies and emerging markets should continue to grow in 2016, creating a -1% decline in insolvencies in advanced economies compared to a +4% increase in emerging markets. Currently, a strong decrease in bankruptcies in the U.S. and Western Europe is offsetting turmoil in Asia and Latin American, but the outlook is increasingly cloudy for emerging markets.
“Brazil, China, Nigeria, Russia, South Africa and Turkey – to name a few – have all been negatively affected by cheaper commodity prices, a looming Fed rate hike which is pressuring currencies and financing, and the overall slow growth mode. World GDP has been growing below 3% for the past five years. High corporate Debt levels, Disinflation and Disruption form a vicious circle in 3D,” added Subran.
Companies in the Asia Pacific region are the most affected by these ‘3Ds’, resulting in a +11% rise in insolvencies in 2015 – the first increase since 2008. China will struggle in particular, with anticipated increases in insolvencies of +25% in 2015 and +20% in 2016. Construction, metals and mining, low-end manufacturing and export-related industries are the sectors likely to take the biggest hit.
The U.S. and Western Europe are both expected to register a steady -10% decline in bankruptcies this year. Some countries, such as Germany, the UK and the United States already enjoy historically low levels. However, other countries, like France or Italy, are struggling to significantly lower their level of insolvencies, while some sectors such as construction remain particularly at risk.
More importantly, the overall improvement in the advanced economies is expected to lose momentum next year. Corporates will have to deal with low global economic growth, still-high debt levels, deflationary pressures, disruptions and business demography dynamics.
Subran continued: “Now that the shock of the crisis has been absorbed, firms need a solid macroeconomic and financial environment in order to turn from stabilization to growth, from protection to promotion. The next 18 months will be quite a litmus test. Diverging trends among countries, sectors, companies of different sizes and changes in legal frameworks will be the key underlying factors to identify the main pockets of risk.” ￼
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