Company insolvencies jump 27%
Company insolvencies in England and Wales have jumped, as firms are hit by a slow-growing economy and high interest rates.
There were 2,163 registered company insolvencies in June, the Insolvency Service reports.
That is 27% higher than in the same month in the previous year – 1,698 firms filed for insolvency in June 2022.
It is higher than levels seen while the Government support measures were in place in response to the Covid-19 pandemic and also higher than pre-pandemic numbers.
But it is a drop on May, when 2,553 insolvencies were reported – a 40% year-on-year surge.
Key events
Gatwick DHL strikes suspended after new pay offer
In a relief to holidaymakers, strikes by nearly 600 DHL workers who work for easyJet at Gatwick have been suspended following an improved pay offer.
The Unite union has announced that strikes scheduled to take place from 28 July to 1 August will now not go ahead, while DHL workers are balloted on a new offer.
If the workers reject the deal, fresh strike dates will be announced, it says.
Unite regional officer Dominic Rothwell said:
“As an act of good faith, Unite’s Gatwick DHL members have agreed to suspend their first set of strikes while they are balloted on the new offer.
However, separate strikes at Gatwick by around 450 ASC, Menzies Aviation and GGS workers are still scheduled to take place from 28 July to 1 August, with a further four days from 4 August to 8 August.
Wall Street has opened cautiously:
DOW JONES DOWN 34.61 POINTS, OR 0.10 %, AT 34,550.74 AFTER MARKET OPEN
S&P 500 DOWN 4.89 POINTS, OR 0.11 PERCENT, AT 4,517.90 AFTER MARKET OPEN
NASDAQ DOWN 30.96 POINTS, OR 0.22 PERCENT, AT 14,213.99 AFTER MARKET OPEN
— First Squawk (@FirstSquawk) July 18, 2023
After that flurry of US economic data… the pound is trading flat against the US dollar at $1.3077.
That’s not too far from last week’s 15- month high of 1.3144, as traders await tomorrow’s UK inflation report.
The CPI index is forecast to drop to 8.2% from 8.7% in May – still four times over the Bank of England’s target, meaning further interest rate increases are likely.
Matthew Ryan, head of market strategy at global financial services firm Ebury, says:
Markets are expecting a drop in the headline number and a stable core index, which we think should be consistent with another 50bp hike at the August Bank of England meeting.
“This is not yet fully priced in, so we see room for continued sterling strength.”
US industrial production drops 0.5%
US industrial production declined by 0.5% in June, the Federal Reserve has reported, in a second piece of disappointing economic data this morning.
That’s the second monthly fall in a row, and missing expectations that output would be flat.
The Fed reports that manufacturing output dropped by 0.3% in June, while mining dropped by 0.2% and utilities declined 2.6%.
US Industrial Production MoM Actual -0.5% (Forecast 0%, Previous -0.2%)
US Manufacturing Output MoM Actual -0.3% (Forecast 0%, Previous 0.1%)
US Capacity Utilization Actual 78.9% (Forecast 79.5%, Previous 79.6%) pic.twitter.com/aCMYBQ7HEc
— HaiKhuu (@HaiKhuuTrading) July 18, 2023
Most major market groups posted declines in June, says the Fed, adding:
The index for consumer durables fell 2.7%, led by notable decreases in the output of appliances, furniture, and carpeting (3.8%) and of automotive products (3.6%).
The decrease of 0.9% in the index for consumer nondurables reflected declines in clothing (2.1%), energy (1.8%), and food and tobacco (1.3%).
Retail spending across America grew by less than expected last month, data just released shows.
US retail sales increased by 0.2% in June, missing expectations of a 0.5% rise, and were 1.5% larger than a year ago.
Sales were pulled down by a 1.2% drop at building material and garden equipment and supplies dealers, and a 1.4% drop at gasoline station sales.
But underlying retail sales rose by 0.6%.
Paul Ashworth, chief North America economist at Capital Economics, suggests that the wildfire smoke which hit parts of the northern US restricted spending:
Motor vehicle sales increased by 0.3%, but we had expected a little more given the rise in light vehicle unit sales already reported by manufacturers.
Food services sales increased by a muted 0.1% m/m which, together with the drop back in building materials sales, could reflect the impact of wildfire smoke, which kept people inside across large swathes of the Northeast.
#retailsales come in just okay, and add to the “cautious consumer” storyline. With more jobs, rising wages and lower inflation, plus relatively low debt, there’s plenty of spending power. But we’re choosing prudence, maybe because the jobs market is losing steam. pic.twitter.com/bs0q2b4yoZ
— Robert Frick (@RobertFrickNFCU) July 18, 2023
IMF chief worried by elevated food and fertilizer prices
The head of the International Monetary Fund has warned that global economic activity is slowing, particularly in the manufacturing sector, and that medium-term growth prospects remain weak.
Kristalina Georgieva, managing director of the IMF, told G20 financial leaders gathered in Gandhinagar, India, today that the global economy has shown some resilience.
But, she says, there are concerning “divergences in economic fortunes across countries” – with some pockets of the global economy doing well, others weakening, and vulnerable countries falling further behind.
Georgieva also told the G20 that inflation was finally trending downward – but headline inflation is still too high and core inflation remains sticky, despite increases in interest rates.
She adds:
Elevated food and fertilizer prices are particularly worrying, especially for low-income households for which food insecurity and malnutrition are now much more persistent.
Georgieva also urged central banks not to let-up in the fight against inflation, saying:
The top priority is to durably bring inflation down. While there is progress, the job is not yet done — monetary policy must stay the course.
A premature celebration can reverse the hard-won gains made so far in the disinflation process.
On a quarterly basis, company insolvencies in England and Wales were up 7% in April-June, reports James Burgess, head of commercial at trade credit insurance firm Atradius UK.
Higher interest rates, inflation, Brexit and the Covid-19 pandemic are all factors, Burgess explains:
“One of the major reasons firms find themselves filing for insolvency is the fall down of supply chains, and this will have huge implications for firms during a recession. If a customer fails to pay on time – or at all – the domino effect on supplier firms is wide-reaching, particularly at times when cash is tight.
“Firms across nearly all sectors are facing multiple ongoing challenges: rising interest rates, stagnant inflation, the ongoing impact of Brexit and Covid, labour shortages, and soaring costs. Many business leaders will no doubt already be having difficult conversations about whether they can continue to operate at all, let alone profitably – and we are seeing the impact of that in the late and failed payment claims, which peaked in Q1 of this year.
Chancellor Jeremy Hunt has warned retailers that the government is ‘watching closely’ to ensure they pass on lower food inflation to consumers, following the drop in price pressures reported this morning.
Food inflation was driven by the global cost of energy rocketing and supply chains being hit. Yet consumers should share the upside as both issues unwind, and we’re watching closely to make sure they do. Hopefully that’s what we’re starting to see. https://t.co/43qWhM710t
— Jeremy Hunt (@Jeremy_Hunt) July 18, 2023
Back in the City, shares in cybersecurity firm Darktrace have surged by 20% after reporting its finances have been given a clean bill of health.
In February, Darktrace engaged EY to conduct an independent review of its finances after claims of questionable marketing, sales and accounting practices by a hedge fund.
EY has now submitted that report, and Darktrace says it does not believe it has any impact on previously filed public company financial statements.
The company says:
In its review, EY reported a number of areas already known to Darktrace where systems, processes or controls could be improved.
It also says the UK’s auditing watchdog, the Financial Reporting Council, has inspected its audits, without any “key findings arising”.
Shares in Darktrace jumped by up to 25%, to the highest level of this year.
Victoria Scholar, head of investment at interactive investor, says:
The stock has surged today by almost 20% bringing its six-month rally to over 40%, reflecting the optimism towards the third party review that rebukes the short-seller concerns. Shares had already been rebounding significantly this year after the company raised its 2023 guidance in April.
The stock is now trading around 350p a share, sharply higher than its IPO price of 250p where it began trading on the London Stock Exchange in April 2021. However, Darktrace still has a long way to go to reclaim the highs from October 2021 at around 945p.”
PwC: Rise in company insolvencies is concerning
Today’s data showing there were 2,163 insolvencies in June is concerning, says James Lewin, director in PwC’s South East Restructuring practice.
Lewin explains:
The total number of insolvencies for the first half of 2023 is approximately 13,000, which is almost 17% higher than H1 2022. Winding up petitions have also doubled in the first half of this year compared to last year, with June 2023 seeing the highest number since November 2019.
“Although so far it’s primarily been smaller businesses falling into insolvency, with 97% being companies with less than £1m turnover, larger businesses are not exempt to the pressures. Similarly, no sectors are immune from the headwinds, with business services, construction and hospitality and leisure the most affected on an aggregate basis. The hospitality sector was particularly hard hit during H1 with nearly a 60% increase in insolvencies compared with the same period in 2022. This reflects the continued pressure on household budgets, with consumers being more selective about their spending.
“In addition, the retail sector is very exposed to the current climate of high interest rates and stubborn inflation, due to its tendency to have low operational leverage and demanding working capital requirements. As a result, unfortunately, we expect to see an increasing number of insolvencies in this sector as the year unfolds.”
Guardian Newsroom: Can the UK avoid a recession?
Guardian Newsroom: Can the UK avoid a recession?
Join Larry Elliott, Heather Stewart and Ann Pettifor in this livestreamed event on the desperate state of the UK economy. On Thursday 20th July, 8pm. Book tickets here
UK insolvencies: the details
Of the 2,163 registered company insolvencies in June:
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There were 1,759 CVLs, which is 21% higher than in June 2022;
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260 were compulsory liquidations, which is 77% higher than June 2022;
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14 were CVAs, which is 75% higher than June 2022;
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There were 130 administrations, which is 44% higher than June 2022.
Inga West, counsel at the law firm Ashurst, says total company insolvencies remain high compared to both last year and pre-pandemic.
West explains:
It’s not just creditor voluntary liquidations and compulsory winding-up numbers that are up – both administrations and company voluntary arrangements are also above June last year. This suggests that insolvencies of mid-market and larger businesses are also creeping up because they tend to use these more expensive processes.
We have now caught up with the Covid backlog – that is the so-called ‘zombie companies’ that were able to avoid insolvency during the pandemic partly or wholly due to the Covid government support measures, and which subsequently needed to liquidate when the support ran out. This boosted numbers for a while, but it looks as if they have now been processed. So today’s high rates reflect the current financial pressures, including high interest rates and high inflation. Businesses that levered up on low interest rates will need to adjust their business models to cope with a sustained period of higher interest rates, which is forecast to last at least into 2024. If they can’t do that, they face some difficult choices and it seems likely that restructuring and insolvency activity will remain high for the foreseeable.
Anecdotally, Ashurst are seeing pressure across all sectors including infrastructure, casual dining and retail.
The recent restructuring plans for Fitness First, Prezzo and Chaptre Finance are “clear examples of this,” West says.
High inflation and interest rates are pushing many struggling companies under, says Sarah Rayment, managing director and co-head of global restructuring at Kroll.
“Insolvencies are on the rise and we are tracking higher rates of administrations and liquidations compared to last year. Ultimately, I don’t think this comes as a surprise. Many companies emerged out of the pandemic already over leveraged.
They are now managing higher borrowing costs and cost inflation, alongside wider economic factors. It’s inevitable not all will survive, especially those in consumer facing sectors. This week’s inflation figures will be watched with great intent.
There were 260 compulsory liquidations in June 2023, which is 77% higher than in June 2022.
The Insolvency Service say:
Numbers of compulsory liquidations have increased from historical lows seen during the coronavirus pandemic, partly as a result of an increase in winding-up petitions presented by HMRC.
