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Economy

Business failures set to reach five year high

Tuesday, 11 December 2007

The number of companies becoming insolvent will rise in 2008 to its highest level since 2003 according to new research from accountants and business advisers BDO Stoy Hayward.

The latest Industry Watch report forecasts that business failures will rise to 17,697 in 2008 – a nine per cent increase on 2007 – as the credit crunch and higher interest rates bites slowing economic growth to 1.8 per cent.

Business failures are predicted to escalate even further in 2009 to 18,142 taking insolvency rates to levels not seen since the dot.com bubble burst. Business failures in 2003 stood at 17,546.

Sectors forecast to be worst hit are the manufacturing, retail, property and construction and services sectors.

Manufacturing sector

A combination of factors including a weakening world economy, tougher international competition, high oil prices and decline in production are predicted to increase business failure rates in the manufacturing sector to 1,994 in 2008 from 1,887 in 2007.

Consumer spending growth is predicted to fall sharply in 2008 to 1.6 per cent from 2.8 per cent in 2007, as interest rate hikes encourage shoppers to save rather than spend.

It is predicted that the numbers of businesses going bust will increase from 1,297 in 2007 to 1,382 in 2008.

Housing market

Mortgage approvals are at their lowest level since August 2005. Predictions of a slowdown in the housing market look set to be realised, with an estimated 1.4 million households short-term fixed rate deals due to expire in 2008.

This will cause delays in construction projects and is likely to result in business failures in this sector rising from 2,345 to 2,576 between 2007 and 2008.

Around 3,757 businesses in the services sector are expected to face insolvency in 2008, an increase of 15 per cent from 2007.

A significant proportion of these companies are predicted to be from the financial services industry. Financial services has largely supported growth in the economy to dat,e but with businesses in this sector set to be most vulnerable to the fall out from the US sub-prime mortgage market and the global credit crunch, business failures will accelerate as a result.

Gloomy picture

Shay Bannon, Business Restructuring Partner at BDO Stoy Hayward LLP, says that British business faces a tough time next year with the number of business failures set to reach levels not seen for five years.

She adds that businesses in most sectors will need to prepare for a more challenging economic environment as the global credit crisis kicks in.

Bannon admits that it is a gloomy picture but says that business failure rates are still a way off from reaching 2002 levels, which saw almost 20,000 companies go bust.

She believes that there are also glimmers of hope for industries such as retail predicted to be bolstered if the Bank of England slashes interest rates and the property sector which will be supported by the build up to the Olympics.

“To avoid becoming another business failure statistic in 2008, it’s important that companies feeling the pinch have contingency plans in place and take action early,” Bannon concludes.

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