Record business failures will be seen this year, says BDO report

Rising unemployment and falling disposable income growth will lead to a sharp reduction in consumer spending and help to drive business failures up to a record 36,200 (almost one hundred businesses everyday) according to the latest Industry Watch report by accountants and business advisors, BDO LLP. 

According to the report, low interest rates and policy measures aimed at boosting the economy are not likely to halt the rate of UK business failures until at least  2011, paving the way for a far worse picture to come in 2010  where a staggering 40,400 (111 businesses everyday) are expected to go under.

As increasingly cautious shoppers emerge in the UK, the report forecasts a 4.0 per cent decrease in consumer spending this year which will impact sectors most reliant on disposable income, including retail, leisure and personal services. One of the main drivers behind falling consumer spending is the decline in employment which is expected to fall by 3.5 per cent in 2009 – the steepest decline since comparable records began in 1971, with a further 1.9 per cent drop in 2010. 

Despite falls in mortgage costs and lower inflation, which have been linked to comparatively robust retail sales seen so far this year, the contraction in consumer spending will mean that 4,300 retailers will become insolvent in 2009 (a 33.3 per cent increase from 2008) according to the report. This figure is set to peak to 7,335 business failures in 2010. Other sectors relying on consumer spending will also be affected. Business failures in the personal services sector, which includes hairdressers and dry cleaners, are forecasted to increase by 55.9 per cent this year to 1,910, and rise to 3,140 in 2010 as consumers tighten their belts. In the leisure sector, 2,550 businesses are expected to fail in 2009 and 3,690 in 2010.

With the UK economy shrinking by 1.9 per cent in the first quarter this year, the report forecasts a 4.5 per cent contraction in economic output in 2009, making this the steepest reduction in economic activity since the 5.1 per cent fall in 1931. Private sector investment is set to nose dive this year by 18.9 per cent as firms delay or cancel capital expenditures on weaker prospects for growth and continued troubles in accessing finance. This will push up business failures in sectors relying on business-to-business demand, such as telecoms, media and technology, where 2,500 businesses are expected to fail this year.

Also reflecting the cutback in corporate investment and the decrease in de-stocking are failures in the manufacturing sector, which is once again the worse hit by the economic downturn. Despite some tentative signs of optimism in the sector due to the competitiveness of British products sold abroad, (which has improved significantly as a result of the sterling depreciation) the number of business failures predicted in the sector for 2009 is 2,900 an increase of 82.5 per cent from the 1,600 actual failures seen in 2008.

Shay Bannon, Head of Business Restructuring at BDO commented: “Business failures in Great Britain are rising unabated as the fall-out of the economic downturn becomes ever clearer. Consumer spending is set for a steep contraction in 2009 and households will continue to be hit by rising unemployment, weaker earnings growth and reduced perceived wealth levels due to declining asset prices. This will drive up business failures in a number of sectors however, we expect slightly less businesses to fail in 2011 as the banking rescue package, rate cuts and other policy measures begin to significantly slow down the rate at which companies fail.”

ENDS

For more information, please contact Dee Crooks at BDO on 020 7893 2761 / 07815 172 051 or email dee.crooks@bdo.co.uk

You can view the full report online by clicking here.

Notes to editors:

Methodology notes

1) Industry Watch is the first study to make projections of total business failures and the business failure rate in Great Britain by sector, based on data for compulsory liquidations, creditors voluntary liquidations, administrative receiverships, administrative orders and company voluntary arrangements (CVA) provided by the Department for Business, Enterprise & Regulatory Reform.
2) The BDO Industry Watch model uses 33 key variables which have shown to be related to business failures by sector. The total number of business failures for Great Britain is based on the aggregated sector forecasts.
3) Annual business failure rates are based on the number of VAT-registered enterprises and cebr have produced forecasts for the number of VAT-based enterprises expected in 2008 to 2012.

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