The UK economy is currently trapped in a state of low growth. Raised interest rates, growing inflation and rising prices of goods and services are all a result of this economic turbulence. The issue is not exclusive to the UK; other major economies including the USA, Canada, some European countries and Japan are also facing the same low-growth situation that needs to be addressed collectively.

The impact of significant global shocks, including an ongoing energy crisis and an unprecedented, once-in-a-century pandemic are all contributing factors to this low growth rate. While consumer inflation is predicted to decrease notably during the year, it is not anticipated to reach its 2% target until early 2025 – which is a long time away. Let’s take a look at how these economic challenges directly impact the distressed business market on the whole: 

Yet another hike in interest rates by Bank of England

The Bank of England has raised interest rates to 5.25% – the highest level in 15 years. It has cautioned businesses and households that borrowing costs will remain elevated. The last time interest rates were above 5.25% was in January 2008, and the Bank now suggests rates may remain above this level until 2025. 

Policymakers attributed the rate hike to strong wage growth in recent months. The possibility of a recession in the coming years has been ruled out. The economy has shown more resilience to high interest rates than expected. However, barriers to bringing down inflation, including high demand for workers, slow decline in food inflation, and increased service costs are still prevalent.

This news is important to note for investors on the lookout for distressed business acquisitions, as this will directly affect investment strategies.  With higher interest rates, distressed businesses in real estate and building construction might find it challenging to secure affordable financing, which could increase the number of opportunities in the market. 

The ruling out of a recession is positive news. However, the barriers therein also pose risks to certain industries including manufacturing and logistics. It is a good idea to diversify portfolios spread across various industries right now. Closely monitoring businesses to assess whether their distress is temporary or systemic will be key during this time.

Update on insolvency numbers across the UK

Insolvencies in England and Wales reached their highest level since 2009 in Q2. 6,342 companies were declared insolvent. This is a 9% increase from the previous quarter, and much higher than usual. Most insolvencies were creditors’ voluntary liquidations, but the most significant rise was in compulsory liquidations.

Despite accounting for the increase in the number of companies formed since 2009, the portion of companies declared insolvent was still the highest since 2014. It currently represents one in every 200 companies as a distressed business. 

So far, the UK has experienced the highest quarterly number of company insolvencies since the financial crisis of 2009, totaling approximately 13,000 corporate failures in the first half of 2023. Increasing inflation and cost pressures for firms are eroding liquidity and shareholder value. This, in turn, is also reducing confidence in meeting future forecasts. 

We may see larger companies, which had been more resilient initially, facing insolvency due to their higher levels of debt and loans in the next few months. Close to 157 businesses entering insolvency reported revenues of over £10 million this year. All of these companies, the likes of Paperchase, Hunter Boot and Dirty Martini have played a crucial role in the UK corporate ecosystem, employing more than 33,000 staff and generating over £6 billion in revenue.

Distressed business numbers low across South West UK

South West businesses accounted for only 5% of administrations in the first half of 2023. This makes it the sixth lowest region in the UK. During this period, a total of 759 businesses filed for administration, with 41 of them coming from the South West. This is a 22% increase compared to the previous year, but still low compared to the North and the Midlands.

Greater London had the highest number of businesses filing for administration, with the North West taking the second spot, and the West Midlands entering the top five regions.

The worst-hit sectors, responsible for 57% of all administrations, were retail, manufacturing, construction, hospitality, and real estate. Greater London had the highest number of filings at 25%, followed by the North West (15%), and the South East (11%), according to data from The Gazette Official Public Record.

If you are an investor seeking distressed businesses to acquire, seeking professional advice early can help you explore more options for turning around struggling businesses . Taking a proactive approach to address underlying issues can help navigate tough trading conditions and increase the chances of survival.