Business failures peak in sight but recovery will be two-speed, says report
Despite more than one in 60 businesses going bust this year, the rise in total business failures is set to end early in 2010 as the UK economy returns to growth and financial strain on businesses eases, according to the latest Industry Watch report by BDO LLP.
However, the report forecasts the road to recovery for businesses will be two-speed as fortunes will be split between the continued strain on consumer sector firms, and improving conditions for the manufacturing, real estate and business sectors.
Conditions for the sectors hit hardest during the downturn such as manufacturers, real estate and construction companies as well as business services, have improved tangibly over the last few months. Indeed, the latest official statistics suggest that the recession for the manufacturing industry has officially ended with manufacturing output growth flat in August after increasing by 0.2 per cent in July, making it the first sector to emerge from downturn.The end of de-stocking, and indeed increasing inventories, will contribute to the rebound of the industry.
Meanwhile, the main driver behind the rapid rise in business failures in construction and real estate was the housing market collapse, which in turn was triggered by the seizing up of capital markets. With a degree of normality returning to financial markets on the back of the considerable monetary and fiscal policy support, the effect of tighter lending should wear off gradually for construction firms and there should also be a tangible effect from increased government spending.
Additionally, demand for business services should also start to recover soon. The PMI services index, a good early indicator, has risen and remained over the critical 50 points mark, which signals output growth.
More consumer focussed sectors on the other hand, will continue to suffer even after the economy returns to growth. Although surprisingly resilient so far, consumer spending will decrease by 3.4 per cent in 2009, taking its toll from rising unemployment and lower wage growth, which will consequently drive up business failures in the leisure, personal services, as well as the retail and wholesale sector. Against this backdrop, the latest forecast suggests that combined business failures in these sectors will rise until autumn 2010.
Shay Bannon, Head of Business Restructuring at BDO LLP, commented: “The economic outlook is looking brighter amidst improved lending conditions and confidence in the markets. This is reflected in the report’s forecast for 2010 which predicts business failures to retreat slightly from the 2009 peak. However, the fall-out of the economic downturn will mean that looking ahead, we can expect business failures to remain on an elevated level in 2010 with 32,700 firms predicted to go under, as recovery will be sluggish, undermined by fiscal cutbacks.”
