RSM insolvency predictor model
26 October 2023
Another quarter has passed with insolvencies in the UK remaining well above historic averages. Similar to UK inflation numbers, they remain stubbornly high albeit Q3 has shown some slight signs of a reduction. The UK continues to face economic challenges such as high inflation, tight labour market and the ongoing cost-of-living crisis. These challenges along with the recent International Monetary Fund (IMF) predictions for the UK in 2024, suggests insolvencies could remain high, with a potential increase still to come.
To assess if levels will remain high, or if we are starting to see a reducing trend, our restructuring advisory team has developed their own predictive model of likely insolvency trends for the next 18 months. The model uses historic insolvency data, and a combination of key economic indicators as its core drivers. It shows that despite ongoing sustained pressures on business, we expect insolvency numbers to gradually return to their historic levels as the broader economy begins to recover. There may be bumps along the road, but the overall trend should be downwards.
The team is well versed in all forms of insolvency and can help you through the process if required. Our specialists provide tailored solutions to help directors and stakeholders prevent the slide into insolvency and provide advice on how best to use a range of tools as positive steps to drive change.
RSM insolvency trends forecast
With stickier inflation than predicted, interest rates only just peaking, and a consistent cost-of-living crisis there are considerable economic headwinds ahead. Many businesses are coming out of the Covid-19 pandemic period carrying a high level of debt on their balance sheets. Corporate insolvency numbers increased significantly post pandemic with many predictions still indicating that this will continue throughout the year, and beyond. We explore this in more detail below, but our fundamental contention is that such predictions underestimate how robust and resilient UK businesses are in the face of ongoing challenge. As a result, we will see insolvency numbers continue in a medium-term downward trend.
The methodology in constructing the forecast is based on underlying macroeconomic indicators that are also reflective of the health of the economy.- Key issues
- Key predictions
- Key statistics
Key issues
- Corporate insolvency is a fundamental and healthy part of our overall UK economy allowing businesses to be saved and capital to be recycled.
- The long-term trend is that around 4,000 companies typically enter an insolvency process every quarter.
- Government support during the Covid-19 pandemic, the prevention of winding up petitions and general creditor forbearance supressed the insolvency numbers from Q1 2020 though to Q3 2021.
- There has been a considerable increase in key categories of insolvencies (creditors voluntary liquidations and compulsory liquidations) and current corporate insolvency numbers remain significantly above the long-term averages.
- Some of this is undoubtedly the ‘catch up’ from insolvencies which were prevented or delayed. All the economic headwinds noted above are having a significant effect on overall insolvency numbers.
- Creditors and key financial stakeholders, including HMRC have been hardening their stance on forbearance and are less willing to wait for payment / provide credit, patience has run out in many situations.
- Business models are having to change rapidly in response to the changing environment, with those standing still likely to lose ground and face financial pressure. Unexpected events such as the Russia/Ukraine conflict and the latest issues in Israel/Gaza make planning and forecasting increasingly challenging, all of which can hamper business recovery and performance.
If you would like any further information, please contact Gareth Harris.
Key predictions
- In our last quarterly update, we predicted that from a high in Q2 2023, corporate insolvencies would fall by c11% by the end of 2023. Q3 2023 is likely to show a fall of 5%, and we expect that trend to continue, with a slightly revised predicted fall by the end of the year of 9% (to around 5,700).
- We previously suggested that Q3 would be ‘an important litmus test as to the health of the UK business environment’, and we believe that whilst not conclusive, it could be seen as a ‘marginal pass’ which provides some optimism that future insolvency levels will fall.
- We remain of the belief that the most significant drop in type of insolvencies will be in shut down creditors voluntary liquidations where the catch up from the low points during Covid-19 and government support have been largely flushed out.
- We also anticipate the initial Q3 trend for more rescue type processes, as larger companies restructure to deal with an overhang of Covid-19 debts, will continue such that administrations will be more of a feature in coming months.
- By the end of 2024 (Q4) we are now predicting that UK corporate insolvency numbers will have fallen by c15% from their overall peak (Q2 2023) but will remain some 34% above the long-term average, the result of relatively slow growth and recovery in the UK economy.
Given the varying recent economic forecasts, there remain some key risks to the forecast trend in insolvency numbers, including:
- with 80% of corporate debt with floating interest rates, and the increase in debt which was necessary to ride out Covid-19, we may not have seen the full impact of the recent increases in interest rates. Particularly as interest payments now absorb some 20% of total profits (up from 8%);
- consumer confidence could continue to suffer and prove more fundamental to demand, particularly in the retail and entertainment sectors;
- there could be a significant time lag to the actions by the Bank of England to drive down inflation, which could tip the balance towards at least a short recession; and
- on a positive note, both consumers and UK corporates have got significant accumulated cash reserves and could choose to spend it rather than compromise on life style, or investment, which could increase GDP.
If you would like any further information, please contact Gareth Harris.
Key statistics
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