The first insolvency data of 2022 shows no let-up in company failures. David Smith, Head of Risk Information for Euler Hermes UK & Ireland, explains why worse is likely to come.
The first insolvency data for 2022 has just been released - and it shows no let-up for hard-pressed firms. The unwinding of Covid-19 relief and high inflation means the figures for the rest of 2022 are expected to climb further.
The Insolvency Service reported 1,560 company insolvencies in England and Wales in January 2022, double that of January 2021 and slightly higher than the pre-pandemic figure of 1,508 in January 2020. Company insolvencies were also up in Scotland and Wales compared to a year ago.
This data follows on from the latest quarterly official figures to December 2021 from the Insolvency Service, which showed that for the fourth consecutive quarter, insolvencies have continued to rise. The quarterly data showed that the construction sector has the highest number of insolvencies of any industrial grouping and history suggests that failures in the construction sector are a lead indicator of wider stress in the economy and of more failures to come.
The majority of government support measure schemes provided during the pandemic have ended while a temporary ban on creditors taking action against businesses also began to be phased out from October of last year.
Another sign of further rises to come in insolvencies is the sharp increase in county court judgments – an indicator of future insolvency - being registered as creditors attempt to recover debts.
Our Economic Research Department has predicted UK insolvencies will be at least 20 per cent higher in 2022 than in 2021. Insolvency practitioners are gearing up for a rise in the number of distressed UK companies in 2022.
Macroeconomic headwinds are facing all sectors, but are particularly tough for those using a large amount of energy or with large bills for logistics, raw materials, freight, or wages (which are also rising quickly).
There is also the challenging outlook on consumer spending. As well as coping with inflation at the highest rates in decades, planned tax rises in April will also hit consumers’ disposable incomes. Some also face higher mortgage payments after the Bank of England raised rates two months in a row, with further increases likely. This is likely to dampen consumer enthusiasm for spending on non-essential goods and services, which were an important support factor for the UK economy in 2020 and 2021.