The Covid pandemic is wilting under the pressure of the vaccine. Dates have been set for the defrosting of the economy. But, will this be enough to save thousands of businesses from business insolvencies that have laid dormant for several months? New projections provided by a leading auditing firm suggest not.
Analysts from Deloitte suggest that business insolvencies in 2021 could rise by levels that were last seen at the height of the financial crisis in 2009. It is projected that a year-on-year rise in business insolvencies of around 60% could easily be seen in the months to come as the economic consequences of the pandemic become crystallized. And, there are several reasons to believe that these grim predictions could easily be reached in the year come.
2020 has been an unusual year for many things. The number of business insolvencies that have been seen during this year’s once-in-a-century health emergency has been one of them. Documented insolvencies have fallen rapidly in Q1, Q2, and Q3, in a manner that is somewhat counter-intuitive when compared to prevailing economic conditions. At a time when the UK economy has been shrinking at rates that haven’t been seen for three centuries, business insolvencies have been falling.
This pattern is perhaps not as surprising as it first appears. It can, however, be taken as an indication that an insolvency backlog is being cloaked. Several reasons point to this being the case. First, the UK government has provided businesses with billions in the form of loans, grants, and rate reductions. This has helped to prop up mothballed firms. Secondly, the economy has changed. Many businesses that would have been stellar performers twelve months ago are now the victims of unforeseen disruptive change. And, third, the economy is likely to remain weak for some time to come. The expectation is that unemployment is yet to reach its peak following the Covid-19 crisis. This is likely to entrench economic uncertainty that will temper levels of consumer confidence in the medium term, further impacting the profits of struggling firms.
Explaining the trend
Business insolvencies in previous years have tended to follow a well-worn trend. Insolvencies tend to be highest in Q1. Followed by a noticeable dip in Q2. While insolvencies remain flat or see a small uptick in Q3 and Q4. However, 2020 has not followed suit. The fall in insolvencies between Q1 and Q2 has been much more pronounced, and this trend has unexpectedly continued into Q3 and Q4.
But, why has this occurred at a time when the economy has collapsed?
The first point that needs to be made, is that in Q2 of 2020, many businesses should have failed. However, this did not occur due to the economic life support that the UK government had begun to dose out. This meant that firms that were struggling could fall back upon government funding to plug the financial gaps that would have been unmanageable under normal trading conditions. Unprofitable businesses have effectively been given a twelve-month reprieve.
However, it is highly unlikely that these weak businesses will perform better in a post-pandemic world. Therefore, the theory is that many businesses that would have folded in the past year will do so once government support is withdrawn.
Conversely, several businesses that were good performers before the pandemic hit will be unable to adjust to altered consumer behaviours. Businesses that operate in the retail, hospitality and transport sectors are all likely to see a reduction in profits in the medium term. The impact of this will see many firms fail that would not have done so without Covid.
The long-term health of the economy is also the subject of scrutiny. Although a rebound in consumer-powered spending is expected throughout 2021 and 2022, the economic recovery is likely to be patchy. Unemployment rises are widely expected, and these will act as a drag on prosperity. Those workers who are currently furloughed are likely to be less inclined to spend in the coming months as they now understand the precarious nature of the jobs that they are employed in.
Consequences for business insolvencies
A withdrawal of governmental support for businesses, a changing society, and a weakened economy will act as a triple-whammy for businesses throughout 2021. Of course, the inevitable effect of these shocks will be a significant spike in the rate of business insolvencies in the medium term. Fortunately, the insolvency experts at Antony Batty will be on hand to assist any business that requires their services as the UK economy begins to open up again.