News

The recession is over but corporate insolvencies continue to rise

The 0.1% increase in GDP announced for Q4 2009 was heralded as great news that the UK economy was out of recession after 6 negative quarters but there are going to be further tough times ahead. Even the GDP figure isn’t great, if the increase in NHS spending is stripped out, the figure is negative again and we all know that government spending needs to be cut dramatically at some time after the general election in May.

The figures for corporate insolvencies for 2009 are not as bad as many had feared at the start of 2009. In the end, there were 19,077 company failures in England and Wales and although this was an increase of 22.8% against 2008 it was way short of the 36,000 figure that some insolvency experts were forecasting.

So if the recession is over and corporate insolvencies were lower than forecast does that meant that it’s all plain sailing from here?

Unfortunately, far from it. Apart from on-going trading difficulties due to low demand and pressure on margins there are also other causes for concern. There are more than 200,000 companies that took advantage of HMRC’s deferred payment scheme during 2009 and these payments need to be made at some stage. If a company couldn’t afford to pay its VAT / PAYE in 2009, will trade have improved sufficiently to allow payment in 2010? There is still much anecdotal evidence that bank lending remains tight (despite bank denials) and what credit there is available is expensive despite the low base rate as banks try to grow their margins.

Finally, history shows that in every previous cycle, the level of corporate insolvencies increases as the economy moves out of recession. This may be caused by companies simply running out of cash as order books grow or it may be that financers and other creditors are more willing to pull the plug on ailing companies when they see that there is more chance of recovering their debts.

None of us can know how 2010 will turn out, but careful credit management will continue to be critical and credit insurance remains a key component of careful credit management.