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Corporate insolvencies set to rise for first time since GFC

Corporate insolvencies set to rise for first time since GFC article image

Corporate insolvencies are set to increase by 2.8 per cent across the globe this year, according to the latest Atradius Economic Research report.

This is the first annual increase in a decade and it is estimated to be followed by another 1.2 per cent increase in 2020. Asia Pacific is also expected to see steady increases in insolvencies, according to the report.

“This latest report suggests that 2019 will be the worst year for insolvencies in advanced markets since the global financial crisis in 2008 and 2009,” said Mark Hoppe, managing director, Oceania, Atradius.

“The business environment has seen a worse-than-expected performance of global economic growth, slowing from 3.2 per cent in 2018 to 2.6 per cent in 2019, two percentage points lower than forecasted last quarter. Trade policy uncertainty is a main reason for lower business sentiment and investment growth, increasing financial risks.”

Mr Hoppe says global GDP growth is forecast to accelerate slightly to 2.7 per cent next year, however, this depends on progress in resolving trade differences.

“With no end to trade tensions in sight, investment will remain subdued and financing risks are rising,” he said. “Therefore, insolvencies are expected to increase slightly again by 1.2 per cent globally.”

Asia Pacific will see a 1.8 per cent increase in insolvencies, which seems minor compared to North America’s forecast 3.2 per cent increase but could still affect local businesses and investors.

Challenging business environment

Insolvencies were forecast to rise in part due to slowing domestic GDP growth and trade growth. The business environment is expected to remain challenging in 2020 with a significant amount of political and economic uncertainty to contend with.

Across all the countries analysed, the United Kingdom (UK) is facing the highest increase in insolvencies in both 2019 and 2020. The upward trend in business failures observed in 2018 has continued in the first half of 2019, increasing 8.9 per cent year-on-year, probably as a result of Brexit-related uncertainty.

The postponement of the UK’s departure from the European Union to October 31 has delayed the recovery of the pound, keeping inflation elevated and prolonging the drag on business investment. As a result, the UK is forecast to see another 10 per cent increase in its insolvency count, with a more modest five per cent increase expected in 2020.

“This insolvency outlook for the UK is based on an orderly Brexit followed by a smooth transition. This is looking increasingly uncertain, so the potential for an even worse performance is high,” said Mr Hoppe.

Corporate bankruptcies on the rise

In the United States, corporate bankruptcies have reversed their decade-long downward trend and are expected to increase three per cent in 2019. This outlook has worsened as businesses face higher financing costs than the year before, a strong dollar, and the unwinding of pro-cyclical fiscal policy as well as trade policy uncertainty and higher tariffs on Chinese imports. Ongoing trade tensions and increasing financial vulnerabilities in the corporate sector are expected to result in another two per cent increase in insolvencies in 2020.

Closer to home, Japan is expected to see a modest two per cent rise in insolvencies, with the manufacturing sector particularly struggling due to cyclical deterioration in capital spending and the stronger yen affecting exports.

These challenges are expected to persist in 2020, while growth prospects are expected to be further constrained by the anticipated consumption tax rate hike slated for Q4.

Australia is forecast to see a two per cent increase in business failures in 2019, with economic weakness from the second half of 2018 carried into a weaker-than-expected Q1 of 2019.

The residential construction sector downturn has deepened and is expected to continue. The outlook for 2020 is slightly brighter with a three per cent decline anticipated due to increased monetary support, government spending, and capital expenditure expectations.

“Conditions are encouraging locally but Australian businesses and investors should keep a strong watching brief on global developments,” said Mr Hoppe.

“Current uncertainty in global markets could conspire to make conditions more difficult, so it’s important to be cautiously optimistic and tighten up credit management strategies to protect cashflow.” 

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