Business Insolvencies, Inflation and Supply Chain

3 January 2024

The Trade Credit Insurance sector is a key component in domestic and international trade. The Trade Credit market has been in a period of transition following from widespread Governmental support through the COVID period. Coming towards the end of 2023 and looking forwards to the start of 2024 is a good time to take stock of where we are economically, what’s happened in the past year and to think about what headwinds we might face in the future.

Our teams of Economists, Credit Analysts and Credit Underwriters are constantly assessing the position of the domestic and global economy. They do this by reviewing the high-level economic indicators that we see regularly in the news, they also meet and talk to many businesses to understand what trends they are experiencing.

For 2023 we have seen that credit risk has definitely returned to our markets. The Government support measures that were in place through the COVID period are running off, inflation has been high and the effects of the raising of interest rates has started to affect demand. This has resulted in a sharp rise in business insolvencies. From our internal data we see higher levels of payment issues and disputes and we are expecting this to continue into 2024.

Some of the key items that we are expecting to experience in the coming period-

  • Borderline recession. While we expect the UK to avoid a full-blown recession, we expect GDP growth to remain low at +0.5% (note this forecast is an increase on the previous 0.3%) and +0.6% in 2023 and 2024, respectively. Export activity has dropped whilst domestic demand has been supported by resilient consumer activity. However, despite unemployment figures remaining positive despite vacancies falling by -24% since their peak we expect that consumer spending will come under pressure as the cost of living effects persist.
  • Sticky inflation. We believe inflation will remain high at around 5% by December 2023, with continued elevated pressures from the services side. Inflation figures dropped sharper than expected in October due to a reduction in energy costs but at 4.6% (with core inflation at 5.7%) we are still way above the Bank of England’s target of 2%. The expectation is that inflation will remain above the 2% target in 2024. Wage growth, which still runs above 8%, in services and manufacturing, will probably stay well above the Bank of England’s September forecasts. Total real wage growth has been positive since June. This is clearly a trend to monitor in the coming months as a wage-price loop could become a real risk to inflation if it continues. As 2024 is a political year, we also expect the minimum wage to be raised further, ahead of inflation forecasts. We expect wage growth at 8% in 2023 followed by 5.2% and 3.2% in 2024 and 2025.  With the low growth forecasts and persistent inflation, we are well in the area of a stagflation economy.
  • Higher for Longer Interest Rates. On the liabilities side, the bulk of outstanding mortgages are fixed for either two or five years and businesses are generally hedged across a similar period. This has slowed the rise in effective average interest rates charged on the outstanding stock of debt. As these fixed rates come to an end consumers and businesses will find spending budgets come under pressure. Recent indications from the Governor of the Bank of England and general market predictions are that interest rates will remain higher for longer due to the stickiness of inflation with the UK estimated to not reduce rates in 2024. For businesses who sit on large debt piles with current low affordability metrics we expect refinancing conditions to be extremely tough.
  • Business insolvencies (UK) are expected to stay 30% above pre-pandemic levels: Globally we expect insolvencies +6% in 2023 and +10% in 2024. The effects of the current market headwinds have left businesses facing multiple pressures on their finances. Trading margins are coming under pressure and we have seen specific issues in sectors like the construction sector where fixed price work does not match the new inflated cost base. Additionally, companies’ cash buffers have been decreasing and the access to new sources of finances have been more difficult especially for SME business. Business insolvencies are at the highest levels since 2009 after almost 26 consecutive months on the upside, with year-to-date numbers showing around 18,347 cases. Hospitality, trade and manufacturing are so far the key contributors to the 2023 increase and additionally in our business we see a clear deterioration in the payment behavior in the construction sector. We expect business insolvencies to keep on increasing in annual terms in 2023 and in 2024 (+16% and +9%, respectively). 
  • Supply Chain Disruption: following from the issues we have experienced through a number of conflicts between key countries and with higher insolvencies and tighter financial conditions we have seen supply chains come under pressure. When we speak to businesses disruptions in the supply chain remain one of the key risks faced. We expect these issues to continue moving into 2024.

Authored by:

Steve Bramall

Stephen Bramall
Credit Director UK and IE

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