UK business insolvencies rise 5.7% Y/Y in 2016 due to currency pressures

The number of insolvencies amid UK companies or groups of companies rose 5.67% in annual terms in 2016, bringing to an end a six-year downward trend. The data comes from an analysis by KPMG, based on notices in the London Gazette.

The numbers show that a total of 1,174 companies, or groups of companies, entered into administration in the UK in 2016, compared with 1,111 in 2015, when the insolvencies hit a 15-year low. The annual change reflects a rise in insolvencies in the second half of 2016.

KPMG’s UK head of Restructuring, Blair Nimmo explained that “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.”

Nevertheless, there seems to be no cause for alarm, as the increase was not a sharp one.

“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.” – Blair Nimmo, KPMG’s UK head of Restructuring.

This stance is in tune with FinanceFeeds’ view of the post-Brexit situation, which has not dented confidence in British business, nor questions the productivity of the UK financial services and fintech sectors. With regard to this, Mr Nimmo mentioned several positive signs for 2017 such as “continued GDP growth, low unemployment and low interest rates, and increased order books in some sectors”.

Of course, the picture is not overly rosy. Mr Nimmo adds:

“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.”

Across sectors, the most vulnerable one in 2016 was construction, due to the increasing costs for imported raw materials which weighed on profit margins. Overall, 174 firms within the construction sector entered into administration in 2016.

Mr Nimmo 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.”

Indeed, the Pound is low. However, this may be blamed mainly on negotiating liquidity agreements, as a recent FinanceFeeds’ analysis suggested. An independent Britain implies that new negotiations have to be made, and a downturn in the value of the pound is inevitable as a result of liquidity shortages. However, it is nothing more than that – simply liquidity shortages.