UK company insolvencies have exceeded levels seen during the financial crisis, driven by high interest rates and reduced consumer spending.
- In the year ending July, 25,551 UK businesses went insolvent, up 1.4% from the 25,186 insolvencies recorded in 2008-09.
- The rise in insolvencies is attributed to the sustained increase in borrowing costs since 2021.
- Retail and hospitality sectors are notably struggling due to the ongoing cost of living crisis.
- Despite economic growth, sectors remain under pressure as energy costs and consumer spending have yet to recover.
According to the latest figures from the Insolvency Service, 25,551 companies went under in the year leading up to the end of July, a 1.4% increase compared to the 25,186 insolvencies recorded during the 2008-09 financial crisis. These figures highlight the mounting pressure on businesses as a result of the sharp rise in interest rates since 2021. Although the Bank of England has been raising borrowing costs for nearly three years, the impact on business failures had been somewhat subdued—until now. The latest data suggests that the strain on corporate finances is becoming increasingly severe, despite the unemployment rate holding steady at 4.4%.
Rebecca Dacre, a partner at Forvis Mazars, commented on the situation, stating, “The latest insolvency figures are a strong reminder that many businesses are still a long way off from recovery. Despite initial signs of improvement in the economy, some sectors are still experiencing severe difficulty as interest rates remain high.” The retail and hospitality sectors, in particular, have been hit hard by reduced consumer spending during the ongoing cost of living crisis. These challenges have made survival increasingly difficult for many businesses in these industries.
In response to these economic challenges, the Bank of England lowered interest rates this month for the first time since March 2020, reducing its base rate from 5.25% to 5%. City traders anticipate two further rate cuts this year, each by a quarter-point. In July alone, 2,150 companies went insolvent, marking a 25% increase compared to the same month in 2023. However, this figure was slightly down from the 2,349 insolvencies recorded in June this year, according to non-seasonally adjusted data from the Insolvency Service.
A rise in business failures is typically associated with higher unemployment and slower economic growth. However, the UK economy has shown signs of resilience this year, with growth of 0.7% and 0.6% in the first and second quarters, respectively. As part of lockdown measures, the government introduced policies to protect businesses from failure, resulting in a temporary decrease in insolvencies. However, the removal of most of these measures in late 2021 led to a surge in business failures.
Corporate finances continue to be squeezed by a combination of rising energy costs, partly due to Russia’s invasion of Ukraine, and consumer spending that remains below pre-pandemic levels. Sarah Rayment, head of global restructuring at Kroll, expressed cautious optimism, noting that looser monetary policy and steady economic growth could offer some relief. “The question is whether they will have enough financial headroom with higher borrowing costs or whether their lenders will give them enough leeway,” she said. “It is perhaps more likely that we will see more restructuring activity in the near future.”
The data underscores the ongoing financial strain on UK businesses, despite some signs of economic resilience.
