The number of business failures is expected to fall by 21.6% from a peak of 26,196 in 2009 to a predicted 20,536 in 2015, according to the latest Industry Watch data. However, the number of business failures will remain above pre-recession levels of 16,431 in 2007, due to the recession having a long tail.
UK businesses are proving resilient to the uncertain global economic climate, with the number of business failures stabilising at a level below most expectations. This suggests that the Bank of England’s policies of keeping interest rates at an all time low of 0.5%, supported by injections of quantitative easing, are trickling through and supporting businesses through the tough economic climate.
A squeeze on UK households’ disposable income as one of the primary reasons behind the slow recovery from the recession. Consumer spending is expected to fall by 0.8% in 2011, caused by the double impact of low earnings growth and high inflation - averaging 4.3% between January and August, more than double the Bank of England’s target rate. This direct pressure on consumers is exacerbated by uncertainty resulting from the US downgrade of growth expectations and the sovereign debt crisis in the Eurozone.
Consequently, consumer-dependent sectors such as retail & wholesale and personal services are likely to be the worst affected. Industry Watch predicts that the number of business failures in retail & wholesale is set to rise by 12.5% to 3,104 in 2011 from 2,759 in 2010, while insolvencies in personal services, such as the hair & beauty and consumer goods repairs, will see an increase of 2.8% to 1,288 in 2011 from 1,252 in 2010.
The uncertain economic climate overseas has also had an impact on the manufacturing sector, which was a key contributor to GDP in 2010. Business failures in the sector will continue to fall in 2011, but will do so at a slower pace than previously anticipated, falling from 1,939 in 2010 to 1,858 in 2011.
The exposure to export markets that bolstered areas such as business services and manufacturing in 2010 - leading to a notable reduction in business failures - has had an adverse impact on these sectors in 2011 as global growth slows. As such, insolvencies in the business services sector are likely to fall only modestly, by 2.2% from 4,463 in 2010 to 4,366 this year. BDO expects business failures in this sector to reach pre-recession levels by 2015.
Given the situations in the US and Eurozone, business failures are at a level below that which we might have anticipated, given the plethora of negative data and, in the longer term, are on a downward trend - the Industry Watch report predicts a year on year fall from 2012 to 2015. There are reasons for optimism despite export markets weakening again this year – we expect inflation to fall back sharply in 2012 and for consumers’ earnings growth to remain constant, giving households greater spending power. In addition, although the pound may strengthen against the Euro, there is little chance of a return to the much higher pre-recession exchange rate. This should continue to give UK businesses an opportunity to find growth beyond sluggish domestic markets and we predict 5.3% export growth in 2012.
The Bank of England’s policies of low interest rates, quantitative easing, together with the HRMC Time To Pay Plan, seem to be equipping businesses with a degree of resilience, despite the difficult economic climate. In particular, we’re seeing that businesses with a turnover of more than £1 million are proving particularly resistant.