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Why has the number of business failures been less than expected? - Shay Bannon
The total number of business failures reached 26,165 in 2009 an increase of 16 per cent compared to the previous year and up by 57 per cent compared to pre–recession levels in 2007. Surprisingly, business failures declined since peaking in the first quarter of 2009 – well before economic output stabilised, according to the latest Industry Watch report.
The rise in insolvencies is certainly considerable and equates to 1 in 74 businesses failing in 2009. However, business failures reached their peak in Q1 2009 and since then we’ve seen a downward trend. Historically business failures are lagging indicators and continue rising well after the economy has turned. So we were surprised to see that business failures rose far less than expectations through this recession and indeed less sharply than during previous recessions.
Usually there is a strong correlation between economic output and business failures but during the 08/09 recession that relationship seems to have been weakened. Surprisingly, businesses have held up better than the economic decline would have suggested.
According to this special edition Industry Watch report a number of factors have worked in tandem to mitigate the worst impact on business during this downturn:
- 1,600 - 2,000 corporate business failures were avoided thanks to the ‘time to pay’ scheme that offers struggling businesses the chance to defer tax payments and was refined in the March Budget.
- Between 3,600 – 4,900 business failures were prevented due to falling mortgage and interest costs which boosted disposable income and corporate profitability.
- Between 800 and 1,050 business failures were avoided due to the impact that the reduction in VAT had on consumer spending
Other factors that have helped businesses weather this downturn have been that Banks have been more flexible when it comes to late payments; we’ve seen more elasticity in the labour market; and, I think on the whole, businesses have learned from the hard lessons of previous downturns.
However, this is not the time to become complacent. With the economic recovery sluggish at the best, and the uncertainty the Election will certainly create, there is the need for continued support in order to avoid a second wave of business failures. A Government of any colour must recognise that enterprise is the UK’s engine room and so any increases in VAT or tax reforms that hinder UK plc’s competitive global standing could seriously upset the apple cart.
To view the full report, please visit www.bdo.co.uk/industrywatch.
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