Begbies Traynor Group Plc - Latest Red Flag Alert Report for Q2 2019
484,000 businesses in significant distress as consumer facing sectors falter
· Number of businesses in significant distress now 484,000 - 14% of all economically active UK businesses.
· Average insolvent company debt increases by 122% in past three years to £66,000
· Businesses in 'critical' financial distress increases 5%
New research from Begbies Traynor, the UK's leading independent insolvency firm, reveals there are now 484,000 UK businesses in significant financial distress with the property, leisure and tourism sectors particularly badly affected.
The Red Flag Alert data for Q2 2019, which monitors the financial health of UK companies, found that 14% of all UK businesses were experiencing 'significant' financial distress at the end of June 2019, with the average debt of insolvent companies more than doubling to £66,226 a year, from £29,872 in 2016. There was also a marked increase in the number of businesses in critical financial distress during the same period - often a precursor to formal insolvency - with a rise of 5% year-on-year.
Low consumer spending impacting business
Businesses reliant on the consumer economy continued to be impacted by falling sales which has affected financial performance across a number of key verticals. The latest Red Flag Alert research highlights rising financial distress in the following sectors; hotels & accommodation (8% rise, 5,095 (Q2 2018) to 5,516 (Q2 2019), sport & health clubs (5% rise, 8,481 (Q2 2018) to 8,940 (Q2 2019) and leisure & cultural activities (4% rise, 12,524 (Q2 2018) to 13,069 (Q2 2019). Additionally the online retail sector (sales via mail order or the internet) experienced a 12% increase in significant financial distress from 5,243 in Q2 2018 to 5,871 in Q2 2019.
Additionally, businesses indirectly reliant on the health of the consumer economy continued to be hit hard with real estate and property companies most affected by the weakest consumer spending since records began in the mid-1990s. This sector saw a 15% year-on-year increase in the number of companies in significant financial distress, rising from 43,085 in Q2 2018 to 49,342 in Q2 2019. The property/real estate sector also experienced a 2% quarter on quarter increase in significant distress (Q1 2018 - 48,309 to Q2 2019 - 49,342) - the highest quarterly percentage increase across any sectors measured in the red flag research.
Financial Services Sector
This latest research reveals increasing levels of significant distress within the financial services sector, with 12,666 businesses now affected, an increase of 5% compared to Q2 2018.
Not surprisingly, the increase in significant distress within this sector has negatively impacted the overall performance of London with a substantial 5% year on year rise in significant distress - the highest of any reported region with the Q2 2019 Red Flag Alert research. This deterioration has been exacerbated by the cooling of the real estate sector in the Capital, all which has resulted in more than 5,000 London businesses slipping into significant distress in the last year (117,683 in Q2 2018 to 123,196 in Q2 2019).
Even though the sector has shown some recovery in the last quarter, it continues to be affected by the uncertainty surrounding Brexit. Once a final decision has been agreed, then stability should return as the fundamentals of this sector remain reasonably good, subject to the other macro economic influences.
Julie Palmer, Partner at Begbies Traynor, said:
"This latest Red Flag Alert demonstrates the ongoing impact of economic and political uncertainty within the UK. While consumer spending has historically driven the UK economy, the latest figures demonstrate that falling spending is now clearly having an impact. This economic stagnation is stifling both business and consumer activity and could leave companies vulnerable unless certainty is restored so that consumers and businesses have the confidence to start spending again.
Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:
Aside from the ongoing uncertainty surrounding Brexit and rising distress within both the Capital and the property and construction sectors there are other more serious economic headwinds facing UK business. The spectre of protectionist economic policy and trade wars are a real threat to the global economy, with even the most respected economists fearing they could "shipwreck" growth and drive the UK towards recession.
We have already seen this with faltering economic performance within the Eurozone economies -and talk of a cut in interest rates in the US. These are not other countries "problems" but will affect many SME's who trade internationally or simply import goods from abroad.