Insolvencies start to increase as currency pressures hit UK businesses

16th January 2017
 New analysis from KPMG reveals that 2016 saw the reversal of a six year downward trend in levels of insolvency for British businesses, following an uptick in companies entering into administration in the second half of the year. The numbers, taken from notices in the London Gazette, show that 1,174 companies, or groups of companies, entered into administration across the UK during 2016, compared with the 15-year low of 1,111 in the previous year. The peak was seen in 2009, following the financial crisis, when 3,376 companies went into administration.

KPMG’s UK head of Restructuring, Blair Nimmo, believes ongoing uncertainty in the geo-political and economic environment, coupled with the depreciation of sterling, is now starting to be felt more keenly by businesses.:“2016 was a game of two halves, with the first six months of the year continuing the downward trend in corporate insolvencies. However, numbers started to creep up in the second half of the year, no doubt in part a reflection of the uncertainty created by the result of the EU Referendum and the fluctuations seen in the currency markets. However, it must be stressed that in relative terms, we only saw a small uptick in insolvency levels – something which does not reflect some of the more gloomy predictions seen in early 2016 about how the post-Brexit corporate landscape would shake out. So while it’s something to keep an eye on, it’s certainly not cause for alarm.”

Looking ahead to 2017, Blair Nimmo expects the numbers of insolvencies to tread a steady path. He said: “The reduction in the value of the Pound against the Euro and the US Dollar will undoubtedly continue to impact those businesses which purchase raw materials, goods or services in these currencies for sale in the UK, and which may find it difficult to pass price increases on to customers. Some sectors are of course more exposed to this than others, as evidenced by the concerns expressed by certain retailers and consumer-facing businesses in recent months. And while there are many positive signs for 2017 including continued GDP growth, low unemployment and low interest rates, and increased order books in some sectors, I still sense a degree of uncertainty such that I suspect businesses will continue to adopt a cautious approach until matters become clearer after the triggering of Article 50. Inflationary pressures will also start to play their part. So while I do not foresee any sudden spike in insolvency numbers on the horizon, I would not be surprised to see the slight steady uptick in administrations continue over the months ahead.”

Looking at which sectors were most vulnerable in 2016, the figures reveal that the construction industry was particularly impacted as increasing costs for imported raw materials squeezed profit margins. In total, 174 firms within the construction sector entered into administration over the course of the year. Other sectors that were prominent in the KPMG research included retailers (89), social care and nursing homes (19), and companies from within the hotels and leisure sectors (26).

Blair Nimmo added: “While construction, social care and consumer-facing businesses felt the heat in 2016, it is particularly interesting to note that the expected hike in oil and gas related insolvencies, due to the low oil price, simply has not materialised. Whilst significant challenges remain in that sector during 2017, there is no doubt that the outlook is now a little more positive than was the case this time last year.”