New research from British insolvency firm Begbies Traynor revealed that 484,000 U.K. businesses are in “significant financial distress,” which is 14% of all the economically active firms in the country.
The “Red Flag Alert” data also showed that the number of firms in “critical” distress, often a precursor to formal insolvency, rose by 17% year-on-year in the first quarter of 2019, prompting concerns that the U.K. could suffer a broader economic slowdown.
Property was the hardest hit sector, with 48,182 companies in significant financial distress, up from 42,512 in the first quarter of 2018, a 13% year-on-year increase.
Construction, often portrayed as the bellwether of the British economy, saw a 10% year-on-year rise in significantly distressed businesses, while financial services had 12,728 businesses affected, a 5% increase from the same period last year.
Julie Palmer, a partner at Begbies Traynor, said the incline in distress for capital intensive sectors such as construction and property was “bad news for the economy,” as construction accounts for 17% of all U.K. businesses, employs 2.5 million people and contributes 6% of the nation’s economic output.
“Worryingly this data shows that this economic malaise is spreading to the U.K.‘s dominant services sector and does need to be stopped in its tracks by a combination of political certainty and a commitment to support U.K. business, particularly SMEs (small to medium-sized businesses) which are the ‘engine room’ of the U.K. economy,” she said.
Executive Chairman Ric Traynor said Brexit uncertainty had hindered business growth and investment, but also highlighted that a combination of faltering European economies and a potential trade war between Europe and the U.S. could have a wider impact on U.K. businesses than its domestic issues.
But he suggested that record high employment figures and growing GDP (gross domestic product) showed the country’s “economic foundations remain strong.”
“If the government is able to right the ship over the next few months, providing greater certainty to businesses and regaining consumer confidence, then there is still time to head to calmer waters and avoid a storm,” he said.
Barclays Chief U.K. Economist Fabrice Montagne, however, suggested that the U.K. picture across the first quarter of this year was not as bleak as the insolvency data suggested.
In a note published Friday, Montagne said that evidence of Brexit-related stockpiling, previously only implied in sentiment surveys, had become more evident in the hard data and boosted activity figures.
“GDP growth was robust through January and February as was job creation with the unemployment rate dipping to 3.9% while retail sales were exceptionally strong in March,” Montagne said.
“Overall, the data support a strong Q1 GDP print, with some upside risks to the forecast of 0.4% quarter on quarter.”
Against a backdrop of a less favorable global environment, a further adjustment in domestic demand means that Barclays economists are forecasting low levels of headline growth for a longer period of time.
Yet Montagne and his team are not forecasting a recession, rather GDP growth of 1.2% for 2019 and 1.2% for 2020.