Global insolvencies are rising for the first time in a decade with the greatest uptick seen in the UK
As global insolvencies increased for the first time in a decade, a leading expert has told Insurance Times the fear of the unknown over Brexit is impacting British business.
Simon Rockett, head of risk services UK for trade credit insurer Atradius was speaking after the underwriter issued its ’Insolvency Outlook’ report which found that global insolvencies are rising for the first time in a decade with the greatest uptick seen in the UK.
The report forecasts business failure rates in developed markets will increase by 2.8% this year – the first rise since the global financial crisis. The rise is largely driven by the loss of momentum in the global economy with growth forecast to slow from 3.2% last year down to 2.6%. However, Atradius reported the UK faces the highest insolvency increase across all advanced markets, forecast to rise as much as 10% in 2019.
Rockett explained: “The slowdown in economic growth is not a trend unique to the UK. Across advanced markets, the recovery has been losing steam since the second half of 2018 and projected to continue gradually slowing, remaining at a subdued rate in 2020. In addition, global trade is now growing at the slowest pace in almost a decade.
Elevated level of uncertainty
“However, the prolonged Brexit process has created an elevated level of uncertainty over a sustained period in the UK. This has had a negative impact on the business environment, the strength of the UK pound and the recovery in investment – a critical component of low productivity.
“Certainly, as the delay to Brexit has continued, insolvency forecasts have worsened. Forecasts earlier this year predicted a rise in UK insolvencies of 7% for 2019, which has already escalated to 10%. For 2020, the current UK insolvency forecast is for a rise of 5%.
”However, this is based on an extension to Article 50 at the end of October, leading to a smooth transition in H1. Deviation from a smooth path, including a no-deal Brexit or an extension followed by a general election, would extend the period of uncertainty and put upward pressure on the number of business failures”
He added that when considering the longer-term outlook, it was important to acknowledge that the UK “is approaching unchartered territory”.
“Without any definite picture of the post Brexit dynamics, or even what happens next if there is no exit at the end of October, the future is impossible to accurately predict, which makes the risk to businesses even more acute.”
Unsurprisingly from a sector perspective, insolvencies have been more acute in the retail, construction and hospitality sectors.
Consumer spending
“The retail sector in particular has been challenged by the pressures on consumer spending, which are closely linked to the broader economic picture, but also by changes in purchasing habits,” added Rockett.
“For instance, we’ve seen retailers with a heavy high-street portfolio struggle in the rise of online shopping with examples including BHS, Debenhams and, most recently, Thomas Cook. When you add the wider economic uncertainty to these challenges, we’re left with a pressure-cooker scenario which creates an elevated risk of insolvencies.”
The firm said the heightened risk of insolvency is a general phenomenon, based on the challenges of the economic and trading environment and concentrations are more based on industry than geography per se.
“However, looking forward, should we enter a hard Brexit, the impacts for the agri-food sector would be negative and whereas we have been seeing the failures in towns and cities on the high street, the rural economies would also be at risk,” said Rockett.
“The message to businesses is clear; protect yourself. A robust trading strategy is one which is built upon solid knowledge of your customers and the wider market. In an environment which is constantly changing, live information on payment practices and customer behaviour is critical in order to spot any red flags.
”Alongside this, businesses need to evaluate their trade relationships and not assume all is well because they are dealing with long-established customer or a large household name; in this environment, nobody is immune.”
He said against this backdrop, the insurance industry has a key role to play.
“Should the risk increase, wherever possible we warn customers in advance so they can take proactive measures to minimise loss. And should the worst happen, trade credit insurance acts as a buffer to pay out claims in the event of non-payment or insolvency.”
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