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Corporate Insolvencies Rising For First Time In Years

Economists continue to raise concerns about rising corporate debt levels, particularly in the two economic powerhouses of the world: the U.S. and China. Ongoing uncertainty over Brexit has sounded alarms over U.K. corporates’ future financial health, too. While businesses are split on whether an economic recession is ahead in the U.S., market volatility is undeniable for many firms around the world. In addition, new research from Atradius revealed the end is near for businesses most exposed to market risks.

In its recent report, “Insolvency Forecasts: Corporate insolvencies begin to rise,” Atradis found that this year is expected to be the first since the 2008 financial crisis in which insolvencies rise, despite financial stimulus initiatives, loosening financial regulations and steady global economy growth in recent years. The insolvency rate among developed markets declined by only 2 percent last year, with analysts pointing to ongoing uncertainty related to trade and monetary policy as catalysts for the anticipated 1 percent increase in insolvencies across advanced markets in 2019.

Geographic Breakdown

Atradius warned that economic outlooks across the Eurozone have “deteriorated,” with Brexit most certainly playing a roll. Indeed, the insolvency rate for the U.K. is expected to rise by 7 percent from last year, while Italy, Switzerland, Sweden and the Netherlands also landed at the top of the list.

“Brexit-related uncertainty is clearly beginning to bite, as reflected by four consecutive quarters of contractions in business investment in 2018,” the report said. “The postponement of investment decisions has large ramifications for smaller firms down the supply chain. This is most severe in the retail and construction sectors, and is set to continue through the coming months.”

Separately, analysis published by consultancy firm Begbies Traynor Group noted a 10 percent increase in corporate insolvencies in 2018, compared to 2017 levels, Business Matters reported last week.

Across the pond, U.S. corporate performance is fairing a bit better, with the insolvency rate expected to remain unchanged for 2019, according to Atradius. Yet, researchers at Coresight Research released data last month that found some U.S. corporates have seen insolvencies surge: In the retail sector, store closures are up 23 percent from 2018 figures, with bankruptcies up, too.

“The number of [bankruptcy] filings in the first six weeks of 2019 [are] already at one-third of last year’s total,” researchers warned about the U.S. retail market, according to USA Today reported.

Throughout the Asia-Pacific region, Japan is expected to see a 2 percent increase in insolvencies this year, Atradius found, while China’s economic slowdown is also expected to further suppress business confidence.

Earlier analysis from Euler Hermes issued a much more stark warning for the Chinese market: Corporate insolvencies are expected to increase 20 percent this year in the country, more than three times the global insolvency rate predicted for the year at 6 percent. Analysts warned that smaller businesses down the supply chain are most acutely impacted by declining corporate strength.

The surge in defaults will be “a big hit to the Chinese economy,” said AIS Capital Managing Partner Xiao Minjie, according to Nikkei Asian Review last month, “Including Japan, a wide range of countries will be equally effected by the disruption in the supply chain.”

There could be more bad news ahead, too, according to Atradius: Despite relative stability in North America and the Asia-Pacific region, these markets could see corporate strength further recede as a result of ongoing trade disputes and “a more difficult external environment,” the report said.

“The recovery of this insolvency cycle in advanced markets has come to an end,” analysts concluded. “In line with easing global GDP growth momentum, insolvencies are expected to increase 1 percent.”

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