The worst may be over, but we predict the recession will have a long tail as business failures set to remain above pre-recessionary levels.
The total number of UK business failures in 2010 is predicted to fall by 18% to 21,600 from a record high of 26,196 in 2009, according to our latest Industry Watch report. However, the number of insolvencies is set to remain above pre-recessionary levels until at least 2013, showing that this recession is not only deep but is likely to last for a number of years.
The marked reduction in the number of business failures is disguising underlying risks, given the recession. The 2011 VAT rise and above target inflation will mean that the average UK household’s income will continue to decrease, meaning people have less cash in their pockets to spend on the nice-to-haves. This will hit the retail, personal services and leisure sectors the hardest.
Although the business environment will remain challenging, businesses can take comfort from some encouraging signs in the economy. With the impact of the government’s spending cuts not expected to be felt until 2011, they should seize the moment and invest in expansion sooner rather than later. Large companies which made substantial cuts during the recession are now sitting on strong cash reserves, and are in a good position to make investments.
From 2011, a combination of tax increases, pay freezes, public sector job cuts and rising energy costs are likely to reduce disposable consumer income. This will result in further business insolvencies in those sectors reliant on consumer spending, such as retail, leisure and personal services.
The Industry Watch report reveals that in 2010, many sectors including Property and Construction, Manufacturing and Business Services are forecast to see business failures fall by over 35%, while in Retail and Wholesale failures are predicted to fall by just over 20%. However while the 2010 figures look encouraging, the report shows that business failures will plateau over the next two years, with 20,100 business failures predicted in 2011, a decrease of 10% and 19,300 expected in 2012 – a decrease of just 800 failures.