The latest report from the Office for National Statistics (ONS) has delivered a gut punch to the people of the United Kingdom. A 0.3% GDP drop between October and December 2023 thrust the economy into a technical recession for the first time since the pandemic’s grip tightened in 2020. A technical recession is marked by at least 2 consecutive quarters of economic decline.

This news lands heavily on the prime minister, whose vow to bolster the economy finds itself at odds with reality. Most economists anticipated a mere 0.1% dip, making this downturn sting even more. Meanwhile, UK inflation holds steady at 4%, defying forecasts, as lower food prices provide some relief to consumers against surging energy costs.

Parallelly, the FTSE-100 climb is a clear signal of the value of the British pound pummeling the pound. As projections for public finances darken amidst the currently high government borrowing rates, the upcoming Budget also remains a point of uncertainty.Over the last few months, British households have continued to grapple with skyrocketing prices and mounting expenses. Official data reveals a staggering seven-quarter slump in economic growth per capita, the worst since records began in 1955. Strikes and adverse weather conditions have further dampened economic activity.

Amid this turbulence, the Bank of England appears poised to slash interest rates as early as summer, responding to mounting concerns about the economy’s resilience after 14 consecutive rate hikes to counter inflationary pressures.

Factors leading up to the Technical Recession

The economic challenges faced by the UK are not unique. In the latter half of 2023, the European Union narrowly skirted recession, while Japan confirmed a second consecutive quarter of economic contraction. The ONS highlighted several areas of weakness in the UK economy at the year’s end, including reduced consumer spending following Black Friday sales in November.

Various sectors felt the strain: healthcare services grappled with strikes by junior doctors, and school attendance dipped by 1%. However, much of this economic turbulence can be attributed to the aftermath of Brexit. Exiting the customs union and single market has already cost the UK economy £140 billion in forgone growth. Projections indicate a potential loss of £311 billion by 2035 when viewed through the lens of gross value added (GVA).

Analysis from Bloomberg has revealed a staggering annual cost of £100 billion due to Brexit, resulting in a 4% smaller GDP than what might have been achieved otherwise. On average, Brexit is draining the UK economy of £75 billion to £125 billion annually, equivalent to 3% to 5% of GDP.

While the impacts of Covid and the Ukraine conflict complicate assessments, comparative studies with other economies underscore an enduring impact. The disparity between actual growth and potential growth has steadily widened since Brexit. One prominent repercussion is the increased expenses and bureaucratic hurdles faced by UK businesses exporting to the EU. Further waves of import controls from the continent, slated for April and October, are expected to add to this challenge.

How has this impacted insolvency in the UK?

In January, the number of registered company insolvencies in England and Wales rose by 5% compared to the previous year, though it was lower than the peak seen last autumn. This surge places insolvencies at their highest rate since 1993. 

Despite the record-breaking levels of insolvencies in 2023, the overall volume of registered companies in the UK has continued to climb over time. Last year’s insolvency data revealed a considerable proportion of Creditor’s Voluntary and compulsory liquidations, indicating SME closures. If more mid-market firms begin to fail, the repercussions could reverberate throughout supply chains.

There were 1,769 company failures in January, up from 1,685 in January 2023. Post-Covid and without government support, many companies are struggling with new economic obstacles and higher borrowing costs, leading to a depletion of working capital. The majority of these are liquidations, primarily impacting small and microbusinesses. Many so-called zombie companies that emerged after the financial crash also contribute to these statistics.

While inflation has significantly decreased from a year ago, consumer-facing businesses still face significant challenges. Sectors like food and drink manufacturing are experiencing a surge in insolvencies. This contends with high energy and staffing costs, unable to pass them on to supermarkets operating on narrow margins. Similarly, retailers and hospitality businesses with poor trading periods may struggle to attract customers as spending tightens.

Retailers and hospitality firms are preparing for the National Living Wage increase in April, which could further strain bottom lines. Moreover, with base rates returning to historical levels, companies planning to refinance in the next 18 months will be challenged by increased borrowing costs and remain willing to consider lender appetite and flexibility.

Key industries to track: Retail 

A surge in retail insolvencies is anticipated in 2024, with six retailers already succumbing to financial difficulties. Facing the headwinds of high inflation and strained personal finances, retailers are already bracing themselves for a tumultuous year ahead.

Among those experiencing distress is Cheltenham-based Superdry. Recent announcements reveal Superdry’s collaboration with Pricewaterhouse Coopers (PwC) on cash-saving initiatives, potentially involving a company voluntary arrangement (CVA). Additionally, the company is exploring options with backers for a potential bid to privatise the brand.

The most significant collapse thus far in 2024 is Lloyds Pharmacy, leaving over 1,000 stores vacant and depriving 1,000 communities of local pharmacy services. More recently, administrators from FRP Advisory were summoned to manage The Body Shop’s affairs, putting over 200 stores and 10,000 jobs in jeopardy. Authentic Brands, Ted Baker’s parent company, is also contemplating a CVA or significant cost-cutting measures, including store closures.

Opportunities for Distressed Business Buyers

Amidst the UK’s widespread economic distress, distressed business buyers have a prime opportunity to excel. With a projected surge in retail insolvencies and numerous retailers already grappling with financial challenges, investors can strategically capitalise on distressed businesses poised for a turnaround. 

This is a unique chance to acquire established brands and assets at discounted prices. By leveraging expertise in turnaround strategies, implementing operational improvements and repositioning struggling brands, investors can build long term profitability steadily. 

For those seeking to stay ahead in this dynamic market, an Administration List subscription offers invaluable insights. Act now by accessing real-time insights on distressed businesses nationwide. Don’t delay – our exclusive, subscriber only report on 2023 market trends, including crucial insights on the technical recession, is set to release soon.  Seize this opportunity to enhance your strategic approach for 2024 and stay ahead of the curve!