New data from insolvency firm Begbies Traynor may set off alarm bells: The number of U.K. businesses considered to be in “significant” financial distress has spiked.
A report released from the company this week found a 25 percent year-over-year increase in the number of companies categorized as being in significant financial distress in Q2, the largest yearly increase the firm has seen in three years, it said.
“Our Red Flag research shows that a recent loss of momentum in the economy is putting increased financial pressure on U.K. businesses, with SMEs bearing the brunt of this rising distress, as businesses contend with uncertainty over Brexit negotiations and an inconclusive election result, alongside rising costs,” said Begbies Traynor Executive Chairman Ric Trayor in a statement.
Researchers at the firm deploy the company’s proprietary algorithm to measure corporate financial distress, factoring in legal and financial data from an array of sources, it explained. Businesses considered to be in “significant” financial distress have had a minor County Court Judgment filed against them, or have been identified by Begbies Traynor’s credit risk scoring system. That system analyzes working capital, profits, net worth and contingent liabilities, according to the report.
Based on this analysis strategy, the firm’s Red Flag report calculated 329,838 companies in significant financial distress during the second quarter, the highest number in at least five years, researchers noted. Small- and medium-sized enterprises endured a 26 percent increase in the number of significantly financially distressed firms, and they make up nearly 94 percent of all companies in this position.
The U.K.’s property and construction industries were hit particularly hard, a trend Begbies Traynor said suggests reflects a slowdown in the nation’s housing and construction markets.
In another statement, Begbies Traynor partner Julie Palmer said this is an especially concerning finding, and raises “doubts over whether they have strong enough foundations to cope with upcoming headwinds, from Brexit and the rising cost of imported goods to the widening skills gap and its impact on labor cost inflation.”
Further, businesses that are most reliant on consumer spend also suffered during Q2, including leisure businesses, retail, automotive and bars and restaurants.
“In the U.K.’s consumer-facing industries, weak real wage growth and rising levels of personal debt continue to put a strain on the retail, bars, restaurants and leisure sectors, where many businesses have been reluctant to fully pass on the inflationary impact of the weakened pound and higher staff costs from the National Living Wage, for fear of losing customers on price in an increasingly competitive marketplace,” Palmer said.
Begbies Traynor’s data follow a Q1 report from Hudson Weir, which found an uptick in insolvencies with a similar focus on the construction, retail, and food and drink markets. The company recorded a 4.5 percent increase in insolvencies in Q1 compared to Q4 2016, with more than 16 percent of those failed businesses falling in the construction sector. Meanwhile, 13.2 percent occurred in the food and beverage space.
According to Traynor, the Begbies Traynor data incite worries over the overall economy.
“These significant increases in financial distress also point to a slowdown in business investment at a time when the overall growth rate of the U.K. economy remains stubbornly sluggish,” Traynor stated.
“As the second half of 2017 begins,” added Palmer, “it’s worrying that so many businesses, particularly SMEs, are facing such instability. These businesses, which are the backbone of our economy, need to be as robust as possible to fuel the U.K.’s growth post-Brexit, yet these figures indicate that many will struggle to fund increases in working capital and invest in growth.”
Indeed, last week the latest data from the Office for National Statistics found that the U.K. economy grew just 0.3 percent in Q2, with annual growth at a measly 1.7 percent. Research also pointed to the construction sector as a particularly weak point.
“Production and construction recorded falls in Quarter 2 2017 of 0.4 percent and 0.9 percent, respectively, each contributing negative 0.06 percentage points to GDP,” explained the ONS. “Agriculture recorded moderate growth of 0.6 percent, contributing nothing to GDP due to the low-industry weight.”
“The economy has experienced a notable slowdown in the first half of this year,” ONS Head of GDP Darren Morgan said in a statement. “While services such as retail and film production and distribution showed some improvement in the second quarter, a weaker performance from construction and manufacturing pulled down overall growth.”