Some 484,000 UK businesses are in significant financial distress, with the property sector particularly affected, giving rise to concerns that the UK could suffer a broader economic slowdown.
Begbies Traynor’s Red Flag Alert data for Q1 2019, which monitors the financial health of UK companies, found that 16% of all UK businesses were experiencing ‘significant’ financial distress at the end of March 2019, while the number of businesses in critical distress during the same period – often a precursor to formal insolvency – rose by 17% year-on-year.
For the second quarter running the hardest hit sector was property, which saw a 13% year-on-year increase in the number of companies in significant financial distress rising to 48,182 (Q1 2019) from 42,512 (Q1 2018). Within this sector, companies involved in buying, selling and letting took much of the hit with a 16% increase in significant distress to 36,018 (Q1 2019) compared with the same period last year – 30,947 (Q1 2018).
Construction, often considered the ‘bellweather’ of the UK economy, has also suffered. Compared with the same quarter last year there are now 10% more companies involved in the development of building projects in significant financial distress – up to 13,018 (Q1 2019) from 11,813 (Q1 2018). This negative trend has also affected other construction sub sectors with a 5% increase in significant financial distress for those companies involved in the construction of commercial buildings 2,451 (Q1 2019) versus 2,328 (Q1 2018). This trend is also replicated in companies involved in the construction of domestic buildings, where significant financial distress has also increased by 5% to 6,209 (Q1 2019) from 5,919 (Q1 2018).
This latest research also reveals increasing levels of significant distress within the financial services sector, with 12,728 businesses affected, an increase of 5% compared with Q1 2018. The sector has been particularly affected by the uncertainty surrounding Brexit with some activity stalling pending clarity on the final outcome. Once a final decision has been agreed, then stability should return as the fundamentals of this sector remain reasonably good.
Deterioration in financial performance has also been felt by the Hotels & Accommodation and Leisure & Cultural sectors with a 9% and 4% respective year-on-year increase of businesses in significant financial distress. Both sectors rely heavily on migrant workers and with net EU migration to the UK falling to its lowest level since 2009, these businesses are having to deal with a perfect storm of a reduced labour supply and increasing costs due to the recent 5% increase in the national living wage.
Julie Palmer, Partner at Begbies Traynor, said: “Many UK businesses are currently in limbo and deferring major investment decisions. This combined with consumers holding back on big ticket purchases has resulted in increasing significant distress across many sectors.
“This trend is reflected in our latest Red Flag research which clearly shows that capital intensive sectors – such as construction and property – are suffering as both business and consumers have taken a cautious approach and limited their exposure. This is bad news for the economy as construction accounts for 17% of all UK businesses, employs almost 2.5m people and contributes 6% of the UK economic output.
“Worryingly this data shows that this economic malaise is spreading to the UK’s dominant services sector and does need to be stopped in its tracks by a combination of political certainty and a commitment to support UK business, particularly SMEs, which are the ‘engine room’ of the UK economy.”