Red Flag Alert - Begbies Traynor Q1 Report reveals increase in distress

Red Flag Alert and Begbies Traynor have released our joint report on the state of financial distress in the UK economy in Q1 2024. Despite the welcome news that the UK economy has left recession our findings show a more worrying picture of major cracks still present in our economy that a minimal increase in growth will not be able to paper over.

Our quarterly reports show the levels of significant and critical financial distress being experienced by UK businesses across 22 sectors. Q1 2024 saw double digit increases, year on year, for both levels of distress.

• Significant financial distress increased by 30.8%; from 424,041 to 554,554
• Critical financial distress increased by 20.1%; from 33,450 to 40,174

All 22 of the sectors included in the report experienced double digit growth financial distress year on year. This is paired with historically high levels of insolvency, with 5,759 companies going insolvent in Q1 2024. High levels of bad debt, servicing debt at increased interest rates and the attrition of the last four years are just some of the many challenges facing businesses that are responsible for the sheer amount of distress and failure.

Whilst all sectors saw notable increases in distress levels year on year, the worst affected were food & drug retailer: 40.8%, general retailers: 38.7%, and construction: 38.6%. These sectors are all also experiencing comparatively high levels of insolvency and have all experienced large failures in the last twelve months. E. g. the Wilko collapse in late 2023 and Geoffrey Osborne’s more recent failure in April 2024.

Construction is also the sector with the highest amount of critically distressed companies along with the highest levels of insolvency; suggesting that many of these critically distressed companies will be unable to trade themselves out of difficulty.

Alongside construction, the support service and real estate sectors make up almost half of the UK’s cases of critical distress. Red Flag Alert’s research into our historical data suggests that significant numbers of the companies currently in critical distress, regardless of sectors, will fail within the next 12 months.

There is also a clear trend in distress when looked at by region. London, the South East and the Midlands are first, second and third respectively in the levels of both significant and critical financial distress. Though given the size of London’s economy relative to each individual region it is generally at the top of most regional lists and it should be noted that our capital is outperforming the rest of the country in terms of growth.

Julie Palmer, Partner at Begbies Traynor said “Despite some optimism as we entered the new year, 2024 has so far been characterised by a continuation of the same pressures that plagued companies in the UK throughout 2023.

“Since the pandemic, hundreds of thousands of UK businesses depleted their financial reserves and loaded their balance sheets with increasingly unaffordable debt which for many may simply be too great to bear.

“As with the prior quarter, the picture is particularly concerning in the consumer facing sectors. We are starting to see this translate into larger companies entering insolvency, a trend that I expect to continue while consumer confidence remains uncertain. On top of that, the higher

levels of financial distress in bellwether sectors such as real estate and construction point to a troubled UK economy.

“Right now, many companies will be pinning their hopes on a meaningful cut to interest rates later this year, but the Bank of England continues to be hawkish, so it is unlikely to make a cut in the near-term given inflation is still higher than expected.

“All of this means that these pressures are here to stay, and I fear this will result in thousands of businesses failing in the coming months as the constant pressures will become too great for many.”

Ric Traynor, Executive Chairman of Begbies Traynor said “We are three months into 2024 and the considerable economic challenges facing many companies up and down the UK show no immediate sign of abating. The macroeconomic conditions that made last year so difficult have continued to exert unrelenting pressure on corporate balance sheets.

“Consequently, our own red flag data shows a marked increase in British firms moving towards insolvency compared to the same period last year.

“Growing geopolitical instability is compounding this problem and impairing the UK economy’s ability to pick up some much-needed momentum post-pandemic. The UK economy is in a precarious enough position as it is, and further instability could cause fuel prices to rise markedly, increasing inflation and slowing the appetite for the predicted cuts to interest rates.

“Unfortunately, there’s no quick fix for our economy and with inflation falling slower than expected, hope of the Bank of England cutting interest rates significantly in the near future seems to be fading.

“Sadly, the pressing issues facing businesses today will simply push many over the edge and contribute to the current high level of UK corporate insolvencies.”