• The economic backdrop remains challenging for UK corporates 
• Growth has been anaemic and cost pressures, albeit diminishing, are still there
• What’s more, higher financing costs are continuing to filter through
• That said, corporate debt levels are low and profitability has remained resilient

We believe that the number of corporate insolvencies and the corporate liquidation rate are close to peaking, although we don’t expect them to fall sharply over the next year or so given the combination of weak growth and high interest rates.

Chart 1: UK company liquidation rate

While the number of insolvencies is at its highest level in three decades, that’s in part because there are more active companies around nowadays. This means it’s more informative to look at the “liquidation rate” – the number of bankruptcies per 1,000 active companies. This rose from 49.6 in Q4 2022 to 53.7 in Q4 2023 – its highest level since Q4 2014. The average figure over the past decade has been 42.7.

Chart 2: Cumulative change in the number of insolvencies

The pace at which the liquidation rate has been rising has eased over the past year or so, although the unwinding of pandemic-era distortions clouds the underlying picture a little. 

In absolute terms, there were 25,158 corporate insolvencies in 2023, which is 13.7% more than in 2022. The non-seasonally adjusted monthly data are volatile, and while there are hints of levelling out, discerning the underlying trend is difficult. 

The red bars in the chart below represent the actual cumulative number of insolvencies since 2019, while the purple line plots what would have been expected to have happened if the pre-pandemic trend had continued. On this basis, the actual number of insolvencies since 2019 is slightly higher than would have been expected, with a total overshoot of around 5,600 – which averages out at around 1,100 extra per year.

Chart 3: Insolvency forecasts for 2024 and 2025

As there’s limited back-data for corporate liquidation rates, the best way of predicting the number of insolvencies in the future is to regress GDP growth against the absolute number of insolvencies. Our regression estimates – which use data from prior to the pandemic – indicate that a 1% rise (or fall) in GDP growth would be expected to reduce (or increase) the number of insolvencies by around 1,400 per year.

So, based on our GDP forecasts for 2024 (-0.3%) and 2025 (+0.6%), we forecast that the number of corporate insolvencies will edge down to 23,300 in 2024 and to 20,300 the following year. These figures would equate to liquidation rates of around 48 in 2024 and 42 in 2025 (as we show in Chart 1 above).

What about the effect of interest rates? In a more normal interest rate environment, our estimates suggest that a 1% increase (or reduction) in interest rates would be expected to increase (or reduce) the annual number of insolvencies by around 250, although the relationship is statistically much weaker than for GDP and insolvencies.

Chart 4: Interest rates on new corporate lending

The relatively rapid rise in funding costs over the past two years due to higher interest rates represents an obvious upside risk for corporate insolvencies in the coming year. Although corporate borrowing rates have begun to inch lower, reflecting the market pricing in rate cuts by the Bank of England, borrowing rates for new business lending are at their highest level since the global financial crisis, as we can see in the chart below. The full impact of monetary tightening is yet to be felt.

On a positive note, corporate profitability has been fairly buoyant in recent years, at or above longer-run averages.

Chart 5: Credit Conditions Survey expected defaults

UK corporate debt levels are at multi-decade lows in terms of debt as a percentage of nominal GDP: they were just 16.2% in Q3 2023, half the level of their 2009 peak and down from a more recent pandemic peak of 23.9%. In cash terms, the debt stock has stabilised in recent years, and has been falling slightly over the past few quarters. 

The Bank of England’s quarterly Credit Conditions Survey (CCS) – a survey of lenders – shows that actual and expected overall credit availability for companies improved modestly in 2023. The inference is that the recent increase in corporate defaults has not been driven by a lack of available funding. 

The CCS also shows that expected default rates have fallen significantly since the pandemic, as the chart below shows. Although expected defaults over Q1 2024 edged up slightly for medium- and large-sized businesses, the latest readings remain broadly in line with longer-run averages. And while small businesses appear somewhat more vulnerable, the trend here too remains towards reduced default rates.

The ONS’s high-frequency BICS survey data continue to suggest there’s considerable polarisation in terms of corporate cash buffers, with a growing proportion of firms reporting that they have less than a month of cash reserves, but also more saying they have more than six months of cash reserves. This suggests that while the corporate sector as a whole is in reasonable financial shape, there’s a sizeable minority of companies that are cash-constrained and potentially more vulnerable. 

The economic backdrop remains challenging for UK corporates. Growth has been anaemic and cost pressures, albeit diminishing, are still there. What’s more, higher financing costs are continuing to filter through. That said, corporate debt levels are low and profitability has remained resilient. 

We believe that the number of corporate insolvencies and the corporate liquidation rate are close to peaking, although we don’t expect them to fall sharply over the next year or so given the combination of weak growth and high interest rates. 

Liquidation rate estimates are also heavily influenced by expectations about how many new companies will be formed – which are rather cautious in the near term – and it is here where the bigger challenge may lie for the UK economy in the coming years.

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