UK insolvencies surge as higher business costs deepen strain

[LONDON] UK insolvencies are rising sharply, with a leading trade credit insurer saying any new government policies that stand to raise business costs risk further pressuring vulnerable sectors.

The increase reflects the impact of measures announced in last year’s budget, including higher minimum wages and reduced business relief rates, according to Coface. The data analysed by the firm showed insolvencies rose 3.9 per cent year-on-year between May and October, reversing a decline seen before the policies took effect in April.

Official data underscore the trend, with the number of insolvencies in England and Wales 17 per cent higher in October than in the same month a year ago.

The pain is hitting hardest in labour-intensive sectors such as hospitality, retail and health services, where razor-thin margins leave firms struggling to pass on higher costs, according to Coface. It also underscores what’s at stake in this week’s budget, as the government weighs new measures to plug a fiscal gap.

“We need a good Christmas and January season here; we need these companies to be able to maintain some sort of margins,” said Jonathan Steenberg, UK chief economist at Coface. “If we could see some sort of support for in particular these SMEs, that would be very, very good.”

Consumer confidence has fallen in the run-up to the budget speech, weighed down by stubborn inflation and uncertainty over the government’s next move. Worryingly, insolvencies are climbing ahead of the traditionally lucrative holiday season, suggesting many businesses are already throwing in the towel.

“The fact that we’re already starting to see it now is usually not a great indicator,” Steenberg said. “If it’s not a good season, then we do expect to see an even bigger increase thereafter.”

Overall, the so-called liquidation rate – which measures insolvencies as a share of total companies in the economy – is now roughly 25 per cent higher than in 2019, according to Steenberg.

To be fair, other European economies including France and Germany are facing their own challenges. US tariffs and Chinese competition have weighed heavily across the region.

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In the UK, however, the situation risks being compounded by stricter immigration policies that could deepen labour shortages in key sectors, Steenberg said. Just last week, the Labour government announced sweeping changes to its immigration rules, including extending the waiting period for some workers to 10 years or even longer before they can apply for permanent residency.

One potential silver lining is that borrowing costs could start to ease soon, provided inflation cools alongside a slowing labour market. Money markets are now almost fully pricing in a quarter-point rate cut next month, followed by another similar reduction by June.

So far, most insolvencies tracked by Coface have been among smaller businesses.

Compulsory liquidations, which are common among larger firms, jumped 50 per cent month-on-month in October, signalling that financial stress is spreading. Even on a three-month rolling basis, the rate of increase was 30 per cent, Steenberg said.

“There are clearly also bigger companies going under,” he said. BLOOMBERG